SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

(Mark One)
[X]      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934 (FEE REQUIRED)

         For the fiscal year ended December 31, 1998

                                                        OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
         SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

         For the transition period from           to          

Commission File  Number 0-7288

                  INTERCONTINENTAL LIFE CORPORATION              
                          (Exact name of registrant as specified in its charter)

     Texas                   22-1890938                      
(State of Incorporation)  (I.R.S. Employer identification number)

701 Brazos, Suite 1400, Austin, Texas                       78701
(Address of Principal Executive Offices)                  (Zip Code)

                        (512)  404-5000                          
(Registrant's Telephone Number)

     Securities Registered pursuant to Section 12(b) of the Act: None

     Securities Registered pursuant to Section 12(g) of the Act:

                  Common Stock, $.22 par value                   
                        (Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.

YES   X    NO     

                                       -1-

<PAGE>



The  aggregate  market value of the voting stock held by  non-affiliates  of the
Registrant  on March 15,  1999,  based on the closing  sales price in The Nasdaq
Small-Cap Market ($16.75 per share), was $38,813,636.

As of March 15,  1999,  Registrant  had  4,394,706  shares of its  Common  Stock
outstanding (excluding shares held in Treasury and not entitled to vote).

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulations S-K is not contained  herein,  and will not be contained,  to the
best of Registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]


                                       -2-

<PAGE>



                                     PART I

Item 1. Business

General

InterContinental  Life Corporation  ("ILCO",  the "Company" or the "Registrant")
was originally  incorporated  in 1969 under the laws of the State of New Jersey.
During  1997,  ILCO  transferred  its  domicile  from New Jersey to the State of
Texas.  This  change  was  approved  by vote of the  shareholders  at the annual
meeting of shareholders held on June 19, 1997. Its executive offices are located
at 701 Brazos, Suite 1400, Austin, Texas 78701.

The Company is principally engaged,  through its subsidiaries,  in administering
existing  portfolios of life insurance  policies and annuity products.  Prior to
the end of 1997, the life insurance  subsidiaries  also administered an in-force
book of accident and health  insurance  business.  In December,  1997,  the life
insurance subsidiaries entered into an agreement, effective as of June 30, 1997,
with a third party insurer whereby the obligations under the accident and health
insurance and the disability income business of the companies was assumed by the
reinsurer.  The  arrangement  provides for an initial period of reinsurance on a
coinsurance basis, pending applicable approvals of the assumption arrangement.

The  Company's  insurance  subsidiaries  are also  engaged  in the  business  of
marketing and underwriting  individual life insurance and annuity products in 49
states  and the  District  of  Columbia.  Such  products  are  marketed  through
independent, non-exclusive general agents.

The Company is controlled by Financial  Industries  Corporation  ("FIC"), a life
insurance  holding company,  through FIC's ownership of approximately 45% of the
Company's  outstanding common stock. FIC, ILCO and their insurance  subsidiaries
have  substantially  identical  managements,  and a majority of the directors of
ILCO are also  directors  of FIC and  ILCO's and FIC's  insurance  subsidiaries.
Officers  allocate  their  time  between  ILCO  and FIC in  accordance  with the
comparative requirements of both companies and their subsidiaries. Roy F. Mitte,
Chairman,  President and Chief  Executive  Officer of FIC, the Company and their
insurance  subsidiaries,  is the beneficial owner of approximately 29.54% of the
outstanding  shares  of FIC's  common  stock.  FIC owns  Family  Life  Insurance
Company,  a  Washington  domiciled   underwriter  of  mortgage  protection  life
insurance.

The Company was organized in 1969 to be the publicly  owned holding  company for
InterContinental Life Insurance Company ("ILIC").  The Company acquired Standard
Life  Insurance  Company  ("Standard  Life") in 1986,  Investors  Life Insurance
Company of California  ("Investors-CA")  and Investors Life Insurance Company of
North America ("Investors-NA") in 1988, Meridian Life Insurance Company, renamed
Investors Life Insurance Company of Indiana  ("Investors-Indiana"),  in February
1995,  State  Auto Life  Insurance  Company  (via  merger of that  company  into
Investors-  Indiana in 1997) and Grinnell Life Insurance  Company (via merger of
that company into Investors- Indiana in 1998).

                                       -3-

<PAGE>



Acquisitions

Strategy. The Company's strategy has been and continues to be to grow internally
and through  acquisitions,  while  maintaining  an  emphasis  on cost  controls.
Management   believes  that,  under  appropriate   circumstances,   it  is  more
advantageous to acquire  companies with books of in-force life insurance than to
produce new  business,  because  initial  underwriting  costs have  already been
incurred  and mature  business is  generally  less likely to  terminate,  making
possible more predictable  profit  analysis.  However,  the Company's  insurance
subsidiaries  continue to market those products that are profitable,  as well as
develop  new  products  and  streamline   distribution   channels.  See  "Agency
Operations". It is also management's belief that the continuing consolidation in
the life insurance industry presents attractive opportunities for the Company to
acquire life  insurance  companies  that  complement or fit within the Company's
existing  marketing  structure and product lines. The Company's  objective is to
improve  the   profitability  of  acquired   businesses  by  consolidating   and
streamlining  the  administrative  functions  of these  businesses,  eliminating
unprofitable  products  and  distribution   channels,   applying  its  marketing
expertise to the acquired  company's  markets and agents,  and benefitting  from
economies of scale. The Company's  ability to make future  acquisitions  will be
dependent  on its being able to obtain the  necessary  financing.  In  addition,
since FIC has the same  acquisition  strategy  as ILCO,  a conflict  of interest
could  arise in the future  between  ILCO and FIC with  respect  to  acquisition
opportunities.

Acquisition of Standard Life. In November  1986, the Company  acquired  Standard
Life,  headquartered  in Jackson,  Mississippi,  for a gross  purchase  price of
$54,500,000.  A portion  of the  funds  used by the new life  insurance  company
formed by the Company to make the acquisition  ("New Standard") was the proceeds
of a loan extended to the Company by a national bank in the principal  amount of
$15,000,000  (the  "Standard Term Loan").  This sum was, in turn,  loaned by the
Company to New Standard, and the loan was evidenced by a surplus debenture.  New
Standard was merged into Standard Life in June 1988.

Acquisition of  Investors-NA  and  Investors-CA.  In December 1988, the Company,
through  Standard  Life,  purchased  Investors-CA  and  Investors-NA  from CIGNA
Corporation for a purchase price of $140 million. The Company obtained the funds
used for the  acquisition  from: (a) a senior loan in the amount of $125,000,000
(maturity   date  December  31,  1996,   payable  in  twenty  -seven   quarterly
installments  of $4 million each,  commencing on July 1, 1989,  followed by four
quarterly  installments  of  $4.25  million  each)  provided  by  six  financial
institutions  (the  "Senior  Loan"),  (b) a  $10,000,000  subordinated  loan  (a
nine-year note,  with an interest rate of 13.25%)  provided by two insurance and
financial  service  organizations  and (c) the  sale of  $5,000,000  of  Class A
Preferred  Stock  (principal  amount of $5 million;  dividend rate of 13.25%) to
CIGNA  and  $15,000,000  of Class B  Preferred  Stock  (principal  amount of $15
million;  dividend rate of 13.25%) to the  subordinated  lenders.  Approximately
$15,000,000  of these funds were used to discharge the Standard  Term Loan.  The
balance of these funds were loaned by the Company to Standard  Life. To evidence
this indebtedness,  Standard Life issued a $140,000,000 surplus debenture to the
Company. In connection with the subordinated debt and preferred stock financing,
the Company issued

                                       -4-

<PAGE>



detachable  warrants  entitling the holders to purchase  1,107,480 shares of the
Company's Common Stock at $3.33 per share.

In May 1990, the Company effected an exchange  agreement with the holders of its
Class A Preferred  Stock and its Class B Preferred  Stock . Under the provisions
of the exchange  agreement,  the holders of the Class A Preferred Stock received
$5 million  principal  amount of a 13.25% 1998 Series  Subordinated  Notes,  due
November 1, 1998,  together with a make whole amount equal to 13.25% of the then
outstanding  balance of the Note.  The  holders of the Class B  Preferred  Stock
received  $15 million  principal  amount of a 13.25%  1999  Series  Subordinated
Notes, due November 1, 1999.

The Company  prepaid the  subordinated  debt and purchased the warrants in early
1993. See "Senior Loan".

Acquisition  of   Investors-Indiana.   On  February  14,  1995,  ILCO,   through
Investors-NA,  purchased  from Meridian  Mutual  Insurance  Company the stock of
Meridian Life Insurance Company, an Indianapolis-based  life insurer, for a cash
purchase price of $17.1 million.  After the  acquisition,  Meridian Life changed
its name to Investors Life Insurance Company of Indiana ("Investors-Indiana").

Acquisition  of State Auto Life.  On July 9,  1997,  ILCO and  Investors-Indiana
acquired State Auto Life Insurance Company, an Ohio domiciled life insurer, from
State Automobile Mutual Insurance  Company,  for an adjusted cash purchase price
of  $11.8  million.  In  connection  with  this  transaction,   the  bank  group
participating  in the  Senior  Loan  agreed  to defer  payment  of $4.5  million
otherwise  payable on April 1, 1997 under the terms of the Senior  Loan,  and to
reduce the amount of the payment  otherwise due on July 1, 1997 by $2.5 million.
This  deferral  resulted in extending  the  maturity  date of the Senior Loan to
October 1, 1998. Under the terms of the transaction,  State Auto Life was merged
into Investors-Indiana.

Acquisition  of Grinnell  Life.  On June 30, 1998,  ILCO,  through a subsidiary,
acquired  Grinnell  Life  Insurance  Company  ("Grinnell  Life") for an adjusted
purchase  price of $16.6  million.  A  portion  of the  purchase  price  ($12.37
million)  was paid by way of a dividend to the seller  immediately  prior to the
closing of the transaction; the balance of the purchase price was paid by ILCO's
subsidiary.  As part of the  transaction,  Grinnell Life was immediately  merged
with and into that subsidiary, with that subsidiary being the surviving entity.

Merger of Insurance Subsidiaries.  Investors-NA redomesticated from Pennsylvania
to  Washington in December of 1992.  Investors-CA  merged into  Investors-NA  on
December 31, 1992, and Standard Life merged into  Investors-NA on June 29, 1993.
The mergers  have  achieved  cost  savings,  such as reduced  auditing  expenses
involved in auditing  one  combined  company;  the savings of expenses  and time
resulting  from the  combined  company  being  examined  by one state  insurance
department  (Washington),  rather  than  three  (California,   Pennsylvania  and
Mississippi);  the  reduction  in the  number of tax  returns  and other  annual
filings  with 45 states;  and smaller  annual  fees to do  business  and reduced
retaliatory premium taxes in most states.

                                       -5-

<PAGE>



In December,  1997,  ILIC  transferred  its domicile from New Jersey to Indiana.
Following completion of the redomestication, ILIC merged with Investors-Indiana,
with ILIC as the surviving entity in the merger process.  Immediately  after the
merger, ILIC changed its name to Investors Life Insurance Company of Indiana. As
used hereinafter, the phrase "Investors-IN" shall be used to refer to the merged
entities.  As a result of the merger,  Investors-IN is licensed in 44 states. As
of December 31,  1998,  it had assets of $188 million and capital and surplus of
$23.1 million.

Management  believes that these  acquisitions and  consolidations  have caused a
reduction in expenses and have further  strengthened the financial  condition of
the combined companies.

Operations

The Company has developed management  techniques to reduce operating expenses by
centralizing,  standardizing  and more  efficiently  performing  many  functions
common  to most  life  insurance  companies,  such as  underwriting  and  policy
administration,   accounting  and  financial  reporting,  marketing,  regulatory
compliance, actuarial services and asset management. The Company has selectively
recruited personnel in sales, marketing and various administrative departments.

The Company's centralized management techniques resulted in significant employee
reductions and expense savings in the life insurance  companies  acquired by the
Company.  During 1998, the general insurance expenses of the Company's insurance
subsidiaries on a statutory basis were  $15,172,682,  as compared to $15,574,265
in 1997 and  $12,008,163  in 1996.  The level of expenses  for the year 1998 was
affected by expenses  incurred in connection  with Year 2000 compliance (see the
discussion  under  the  caption  "Data  Processing"),  as well  as the  expenses
incurred in connection with the acquisition of Grinnell Life Insurance  Company.
The increase in 1997,  as compared to 1996,  resulted  primarily  from  expenses
incurred in connection with ILCO's  acquisition of State Auto Life in July, 1997
and expenses  related to the  modification of data  processing  systems for Year
2000  compliance.  Management is committed to maintaining the general  insurance
expenses of the Company's insurance  subsidiaries at a level which will generate
an acceptable level of profitability  while maintaining the competitive  pricing
of their insurance products.

In June  1991,  FIC  acquired  Family  Life  Insurance  Company.  Following  the
acquisition of Family Life by FIC, management  integrated the sales,  marketing,
underwriting,  accounting, contract and licensing, investments,  personnel, data
processing,  home office  support and other  departments  of Family Life and the
life insurance  subsidiaries of ILCO.  Management  believes this integration has
resulted in cost  savings for ILCO's  insurance  subsidiaries  and Family  Life.
During  1992,  the  Company's  insurance  operations  were  centralized  at  the
Company's  headquarters in Austin, Texas, with the exception of certain services
performed  in  Seattle,   Washington.   Management   believes  that   relocating
administrative functions to Austin has reduced costs and improved the efficiency
of the  insurance  companies'  operations.  The number of  employees  within the
Company   and  its   subsidiaries   (including   employees   who  also   perform
administrative  services for Family Life) was  approximately 322 at December 31,
1998.


                                       -6-

<PAGE>



Principal Products

The Company's  insurance  subsidiaries  are engaged  primarily in  administering
existing   portfolios  of  life   insurance   policies  and  annuity   products.
Approximately  80.6 % of the total collected premiums for 1998 were derived from
renewal  premiums  on  insurance  policies  and  annuity  products  sold  by the
insurance subsidiaries prior to their acquisition by the Company.

The  Company's  insurance   subsidiaries  are  also  engaged  in  marketing  and
underwriting individual life insurance and annuity products in 49 states and the
District  of  Columbia.   These  products  are  marketed  through   independent,
non-exclusive general agents.

The products  currently being distributed  include several versions of universal
life  insurance,   which  provide  permanent  life  insurance  protection  while
crediting  company-declared  current  interest  rates to the  cash  value of the
policy.  The  universal  life  insurance  portfolio of the  Company's  insurance
subsidiaries  consists  primarily of flexible  premium  universal life insurance
policies.  Under  the  flexible  premium  policies,  policyholders  may vary the
amounts of their coverage (subject to minimum and maximum limits) as well as the
date of payment and frequency of payments.

Direct  statutory  premiums  received from all types of universal  life products
were $38.9  million in 1998,  as  compared to $40.6  million in 1997,  and $40.6
million in 1996.  Investors-NA received reinsurance premiums from Family Life of
$2.5 million in 1998,  pursuant to the reinsurance  agreement for universal life
products written by Family Life. In 1998, premium income from all life insurance
products  was  derived  from  all  states  in  which  the  Company's   insurance
subsidiaries are licensed,  with significant  amounts derived from  Pennsylvania
(14 %), Ohio (8 %) and New Jersey (8 %).

The  Company's  insurance  subsidiaries  received  premium  income  from  health
insurance  policies.  In 1998, premium income from all health insurance policies
was $1.0 million as compared to $0.9  million in each of 1997 and 1996.  Premium
income from health insurance in 1998 was derived from all of the states in which
those two insurance subsidiaries are licensed,  with significant amounts derived
from  Illinois (22 %), New Jersey  (16%) and  Pennsylvania  (15%).  As described
below,  the health  insurance  business of the  Company's  subsidiaries  is 100%
reinsured with a third party reinsurer.

In December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance
treaty under which all of the  contractual  obligations and risks under accident
and health  insurance  policies  were  assumed by a third party  reinsurer.  The
transfer  was  effective  as of  July  1,  1997.  These  risks  and  contractual
obligations were sold pursuant to, first, a coinsurance  reinsurance  agreement.
Following applicable regulatory approvals,  the reinsurer will assume the direct
obligations of the companies,  on an assumption  reinsurance basis. The decision
to dispose of this book of business was based on management's  analysis that the
business was not  generating  targeted  profit  objectives and that the products
were not part of the core  business of the  subsidiaries.  The sale  permits the
companies to focus on its primary  business - life  insurance and annuity sales.
In connection with the transaction,

                                       -7-

<PAGE>



the total amount of net reserves transferred by the subsidiaries was $6,327,504.
In addition to the transfer of reserves,  the life  companies paid the reinsurer
$1,037,150 in connection with the transaction, which amount was accounted for as
an expense  for the year ended  December  31,  1997.  In 1997,  the  transferred
business generated approximately $791,000 in annualized premiums.

Investors-NA  sponsors a variable annuity separate account,  which offers single
premium and flexible  premium  policies.  The policies  provide for the contract
owner to allocate  premium  payments among four  different  portfolios of Putnam
Variable  Trust (the  "Putnam  Fund"),  a series fund which is managed by Putnam
Investment  Management,  Inc. Prior to April,  1995,  the underlying  investment
vehicle for the variable annuity  contracts was the CIGNA Annuity Funds Group. A
substitution  of the Putnam  Fund for the CIGNA  Funds was  completed  in April,
1995.  The plan of  substitution  was  approved by the  Securities  and Exchange
Commission. Following such approval, the plan was submitted to policyholders for
approval,  which was obtained.  As of December 31, 1998,  the assets held in the
separate account were $51.3 million. During 1998, the premium income realized in
connection with these variable annuity policies was $156,419, which was received
from existing contract owners.

Investors-NA  also maintains a closed variable  annuity separate  account,  with
approximately  $21.6  million of assets as of December  31,  1998.  The separate
account was closed to new  purchases in 1981, as a result of an IRS ruling which
adversely affected the status of variable annuity separate accounts which invest
in  publicly-available  mutual funds.  The ruling did not  adversely  affect the
status of in-force contracts.

During 1997, ILCO's life companies expanded their marketing efforts in the fixed
annuity  market.  Direct  deposits from the sale of fixed annuity  products were
$6.1 million in 1998,  as compared to $3.5 million in 1997,  and $1.7 million in
1996.  Investors-NA also received  reinsurance premiums from Family Life of $1.7
million in 1998,  pursuant  to a  reinsurance  agreement  for  annuity  products
between Investors-NA and Family Life Insurance Company.

During  the fourth  quarter  of 1998,  Investors-NA  developed  a group  deposit
administration  product,  designed  for use in  connection  with the  funding of
deferred compensation plans maintained by government employers under section 457
of  the  Internal   Revenue  Code.  The  company  has  established  a  marketing
relationship with a third-party administrator based in San Antonio, Texas, which
has  established  relationships  with  school  districts  in Texas.  The company
anticipates that enrollments will commence during the second quarter of 1999.


                                       -8-

<PAGE>



The following table sets forth, for the three years ended December 31, 1998, the
combined  premium  income and other  considerations  received  by the  Company's
insurance subsidiaries from sales of their various lines of insurance.

<TABLE>

                                             Year Ended December 31,
<S>                                           <C>           <C>            <C>    
Type of Insurance Premium                    1998          1997           1996
                                        (In thousands)
Individual:
Life ..............................      $ 10,528       $ 10,163       $  8,780
Accident & Health .................           994            792          1,035

Total Individual Lines ............        11,522         10,955          9,815

Group:
Life ..............................         2,323          2,639          2,018
Accident & Health .................            11             40              0

Total Group Lines .................         2,334          2,679          2,018

Credit:
Life ..............................           (21)           (27)           (85)
Accident & Health .................            (3)            14            (57)

Total Credit Lines ................           (24)           (13)          (142)

Total Premium .....................        13,832         13,621         11,691
Reinsurance Premiums Ceded ........        (2,942)        (2,590)        (1,711)

    Total Net Premium .............        10,890         11,031          9,980

Amount Received on
Investment Type Contracts .........        48,739         47,862         47,135

     Total Premiums and
    Deposits Received .............      $ 59,629       $ 58,893       $ 57,115

</TABLE>


                                       -9-

<PAGE>



Investment of Assets

The  assets  held by the  Company's  insurance  subsidiaries  must  comply  with
applicable  state  insurance laws and  regulations  pertaining to life insurance
companies.  The investment portfolio of the Company's insurance  subsidiaries is
tailored to reflect the nature of the  insurance  obligations,  business  needs,
regulatory  requirements  and  tax  considerations  relating  to the  underlying
insurance  business with respect to such assets.  This is particularly  the case
with respect to interest-sensitive life insurance and deferred annuity products,
where the investment  emphasis is to obtain a targeted margin of profit over the
rate of interest  credited to  policyholders,  while endeavoring to minimize the
portfolio's  exposure to changing interest rates. To reduce the exposure to such
rate changes, portfolio investments are selected so that diversity, maturity and
liquidity   factors   approximate   the  duration  of  associated   policyholder
liabilities.

The investment objective of the Company's insurance subsidiaries  emphasizes the
selection of short to medium term high quality  fixed income  securities,  rated
Baa-3  (investment  grade) or better  by  Moody's  Investors  Service,  Inc.  At
December  31, 1998,  only 1.5% of the  Company's  total assets were  invested in
mortgage loans or real estate.  Non-affiliated  corporate debt  securities  that
were  non-investment  grade  represented  0.3% of the Company's  total assets at
December 31, 1998. The Company had  investments in debt securities of affiliated
corporations aggregating approximately
 $47.6 million as of December 31, 1998.

Investments  in  mortgage-backed  securities  included  collateralized  mortgage
obligations   ("CMOs")  of  $212.1  million  and  mortgage-backed   pass-through
securities of $32.1 million at December 31, 1998.  Mortgage-backed  pass-through
securities,  sequential CMOs and support bonds,  which  comprised  approximately
42.6% of the book value of the Company's mortgage-backed  securities at December
31, 1998,  are sensitive to  prepayment  and  extension  risks.  The Company has
reduced the risk of prepayment  associated  with  mortgage-backed  securities by
investing in planned  amortization  class  ("PAC"),  target  amortization  class
("TAC")  instruments,  accretion  directed  bonds  and  scheduled  bonds.  These
investments  are  designed to amortize in a  predictable  manner by shifting the
risk of prepayment  of the  underlying  collateral  to other  investors in other
tranches  ("support  classes") of the CMO. PAC and TAC instruments and accretion
directed and scheduled bonds represented  approximately 37.8% and sequential and
support  classes  represented  approximately  34.6%  of the  book  value  of the
Company's  mortgage-backed  securities  at December 31, 1998.  In addition,  the
Company  limits the risk of  prepayment  of CMOs by not paying a premium for any
CMOs. The Company does not invest in  mortgage-backed  securities with increased
prepayment  risk, such as  interest-only  stripped  pass-through  securities and
inverse  floater  bonds.  The  prepayment  risk  that  certain   mortgage-backed
securities are subject to is prevalent in periods of declining  interest  rates,
when  mortgages  may be  repaid  more  rapidly  than  scheduled  as  individuals
refinance higher rate mortgages to take advantage of the lower current rates. As
a result, holders of mortgage-backed securities may receive large prepayments on
their  investments  which cannot be reinvested at an interest rate comparable to
the  rate on the  prepaying  mortgages.  The  Company  did not  make  additional
investments  in CMOs during 1998, and the current  investment  objectives of the
Company do not contemplate  additions to the portfolio of CMO investments during
1999.

                                      -10-

<PAGE>



The Company does not invest in non-agency mortgage-backed securities, which have
a greater credit risk than that of agency mortgage-backed securities.

The  Company  does  not  make  new  mortgage  loans  on  commercial  properties.
Substantially all of the Company's  mortgage loans were made by its subsidiaries
prior to their  acquisition  by the Company.  At December 31, 1998,  0.8% of the
total book value of  mortgage  loans held by the  Company  had  defaulted  as to
principal or interest for more than 90 days, and none of the Company's  mortgage
loans were in  foreclosure.  During 1998,  none of the Company's  mortgage loans
were converted to foreclosed real estate or were restructured  while the Company
owned them.

Another  key  element of the  Company's  investment  strategy  is to avoid large
exposure in other investment  categories which the Company believes carry higher
credit or liquidity risks,  including private placements,  partnerships and bank
participation.   These  categories  accounted  for  approximately  0.4%  of  the
Company's invested assets at December 31, 1998.

Investors-NA  was  the  owner  and  developer  of  Bridgepoint  Square  Offices.
Following the  completion  of the  construction,  the project  consisted of four
office  buildings,  with a total rentable space of approximately  364,000 square
feet, and two parking garages.  Investors-NA purchased the 20 acre tract of land
for this  complex  in  January,  1995.  At that  time,  the tract  included  one
completed and fully leased office  building,  an adjacent  parking  garage,  and
sites for three more office  buildings and another parking garage.  Investors-NA
completed  construction  of the three  remaining  office  buildings  and parking
garage in 1997.

In May 1996,  Family Life Insurance Company  ("FLIC"),  an indirect,  100% owned
subsidiary  of  FIC,  purchased  a 7.1  acre  tract  adjacent  to  the  original
Bridgepoint  Square tract. This second tract contained one building site and one
garage site. In January,  1997, FLIC began  construction on a four-story  office
building,  with rentable  space of  approximately  76,793  square feet,  and the
parking garage, with 350 parking spaces. In May, 1997, the entire rentable space
was leased to a major tenant in the  technology  business.  Construction  of the
parking garage and the building shell was completed in October, 1997.

In November,  1997,  Investors-NA  and Family Life entered into a sale agreement
with an independent  third party for the sale of their  respective  interests in
Bridgepoint Square Offices.  The transaction,  which closed on December 5, 1997,
was for an aggregate  price of $78 million.  The sale  resulted in a net pre-tax
profit to Investors-NA of approximately $14.0 million,  and a net pre-tax profit
to Family Life of approximately $4.5 million. See Item 2. Properties.

In October, 1998, Investors-NA purchased two adjoining tracts of land located in
Austin,  Texas  totaling  47.995 acres.  The aggregate  purchase price for these
tracts was $8.1  million.  Investors-NA  has  obtained  approval  of a site plan
development  proposal for these tracts.  The development permit provides for the
construction  of seven office  buildings  totaling  600,000  square  feet,  with
associated parking,  drives and related  improvements.  The initial phase of the
project ("Phase One") will consist

                                      -11-

<PAGE>



of two office  buildings,  associated  parking  and the  infrastructure  for the
entire  project.  Construction  on Phase One began  during the first  quarter of
1999.

The Company has established and staffed an investment department,  which manages
portfolio  investments  and  investment  accounting  functions  for ILCO's  life
insurance subsidiaries.

Agency Operations

ILCO's  insurance  subsidiaries  collectively  market  through  the  "Investors"
distribution  system.  Independent  non-exclusive  agents,  general  agents  and
brokers are recruited nation-wide to sell the products.  Such agents and brokers
also sell insurance  products for companies in competition with ILCO's insurance
subsidiaries.  In order to attract  agents and enhance the sale of its products,
the  Company's  insurance  subsidiaries  pay  competitive  commission  rates and
provide other sales  inducements.  The Investors  sales  distribution  system is
presently concentrating its efforts on the promotion and sale of universal life,
term life and fixed annuity products.

Marketing and sales for all of the Company's insurance subsidiaries are directed
by the  Executive  Vice  President  of  Marketing  and Sales.  The  Senior  Vice
President  for  Investors  Sales  directs   Regional  Vice  Presidents  who  are
responsible  for the  recruitment  and  maintenance  of the  general  agents and
managing general agents for individual  insurance sales.  Beginning in 1999, the
Company will implement a plan to restructure the  compensation  arrangements for
Regional Vice Presidents,  so as to emphasize the role of personal production by
the RVPs.

Data Processing

Since December,  1994, the data  processing  needs of ILCO's and FIC's insurance
subsidiaries  have been provided to ILCO's and FIC's Austin,  Texas and Seattle,
Washington  facilities by FIC Computer Services,  Inc., a subsidiary of FIC. See
Item 13 - Certain Relationships and Related Transactions with Management.

As the  provider of data  processing  for the Company and its  subsidiaries  and
affiliates,  FIC Computer Services,  Inc. utilizes a centralized computer system
to process  policyholder  records and financial  information.  In addition,  the
Company  uses   non-centralized   computer  terminals  in  connection  with  its
operations. The software programs used by these systems will be affected by what
is referred to as the "Year 2000 problem" or "Y2K  problem".  This refers to the
limitations of the programming  code in certain  existing  software  programs to
recognize  date  sensitive  information  as the  year  2000  approaches.  Unless
modified  prior to the year 2000,  such systems may not properly  recognize such
information  and  could  generate  erroneous  data or cause a system  to fail to
operate properly.

In response  to the  potential  operations  and policy  administration  problems
caused by the computer calendar change on January 1, 2000, the management of the
Company   instructed  FIC  Computer   Services,   Inc.  to  analyze  its  system
capabilities and the operational  requirements of the Company and its respective
subsidiaries and affiliates with respect to the Y2K problem. In 1996, FIC

                                      -12-

<PAGE>



Computer Services,  Inc. conducted the analysis of all of the Company's systems.
After  reviewing that  analysis,  the Company  determined  that a plan should be
devised to prevent the data processing errors that may be encountered due to the
Y2K problem. In November,  1996, a three-year plan outlining a proposed solution
(the "Plan") was  established  and approved by the Company to ensure that all of
the  data  processing  systems  would be Y2K  compliant  or  converted  onto Y2K
compliant systems.  The Company began the major work under this Plan in 1997 and
it is scheduled to be completed by the Fall of 1999.

The Company established this Plan because FIC Computer Services, Inc.'s analysis
revealed  that  those  systems  that  are not  converted  or  modified  into Y2K
compliant systems, may produce policy  administration  errors as a result of the
calendar  change,  requiring  that  the  life  insurance  subsidiaries  manually
administer  those  policies.  This  would  result  in  a  material  increase  in
administrative  costs incurred by the life insurance  subsidiaries  of both ILCO
and FIC.

The Company's  analysis  also  indicated  that, in addition to potential  policy
administration  errors in the life  insurance  subsidiaries,  any machine  which
contains  a  microchip  is  subject  to error  due to the Y2K  problem.  Such an
occurrence could not only create errors in the Company's  internal systems,  but
those of the Company's suppliers and service providers.  In order to prepare for
this contingency,  the Plan called for the acquisition of new mainframe hardware
and software,  and the modification and conversion of the Company's  telephones,
voice mail and desk-top personal computers.

The Plan calls for a  conversion  of certain  systems  onto the  Company's  CK/4
System,  a  system  which  is  designed  to be Y2K  compliant  according  to the
representations  of the vendor.  Those systems  which are not converted  will be
upgraded  by  changing  individual  lines of  computer  code in order to  modify
current operating software such that it will become Y2K compliant.

Under the Plan,  FIC Computer  Services,  Inc.  will utilize its own  personnel,
acquire Y2K compliant operating  software,  and engage the assistance of outside
consultants to facilitate the systems conversions and modifications. The Company
is in the process of this systems  conversion and  anticipates  that the project
will be completed  in advance of the year 2000.  The Company has  increased  the
budget for the  implementation  and  completion of the Plan from the prior years
estimate.  As of December  31,  1997,  the Company  had  budgeted  approximately
$470,000 for implementing the Plan. Based on its current  analysis,  the Company
expects that the cost of implementing  and completing the Plan will result in an
after-tax  expense of  approximately  $587,000 for the three-year  (1997 - 1999)
conversion  period.  For the twelve month period  ended  December 31, 1998,  the
Company  has  incurred  an  after  tax  expense  of  approximately  $158,000  in
connection with the completion of the Plan. Between January 1, 1997 and December
31,  1998,  the  Company  has  expended  approximately  50.7% of the  three-year
expected  after-tax  cost discussed  above.  In the event that the Plan does not
achieve full compliance by the target dates, or if unforeseen  matters involving
Y2K appear before or after  January 1, 2000,  the Company will utilize the staff
of FIC  Computer  Services,  Inc. to identify  and resolve such issues as and if
they arise.


                                      -13-

<PAGE>



In order to continuously  evaluate the  effectiveness of the  modifications  and
conversions  made to the  various  systems,  FIC  Computer  Services,  Inc.  has
acquired  testing  software  to  simulate  dates on or after  January  1,  2000.
Additionally,  FIC Computer Services, Inc. runs the systems through model office
cycles and also  conducts  visual  inspections  of screen  displays to determine
whether the systems are functioning in a Y2K compliant manner.

As of March 1, 1999, FIC Computer Services, Inc. estimated that it had completed
the necessary conversions and modifications on the administrative  systems which
process  approximately  66 % of the  insurance  policies for the Company and its
subsidiaries.  This included the  conversion  of the ALIS System  (administering
approximately  42,000 active policies) to CK/4 in February,  1998, the System 38
(administering approximately 9,400 active policies) conversion in January, 1997,
the TI System (administering  approximately 5,240 active policies) conversion to
CK/4 in  July,  1998 and the  conversion  of the  Lifecomm-B  system  (which  is
responsible for  approximately  18,000 policies assumed after the acquisition of
State  Auto  Life)  in  February,1999.  The  conversion  of the  Life 70  system
(administering   approximately  16,120  active  policies  for  Investors-IN)  is
scheduled for completion in May,  1999. The conversion of the Lifecomm-A  system
(administering   approximately  62,410  active  policies  for  Investors-NA)  is
scheduled for  completion in September of 1999. The  modification  of one of the
Company's  smaller systems which administers  approximately  3,680 active credit
life policies was completed on schedule in December, 1998. The modification of a
smaller system which  administers  approximately  15,550 active  industrial life
policies is scheduled for completion in June of 1999.

The various  software  applications  described above are licensed to the Company
under agreements which permit the Company's  subsidiaries to process business on
its computer systems utilizing such software.

In 1997,  FIC Computer  Services,  Inc.  purchased  new  mainframe  hardware and
accompanying  operating  software,  which the vendor has  represented  to be Y2K
compliant.  FIC Computer  Services,  Inc. has  completed  the  installation  and
testing of such new  mainframe  hardware and software  for  compliance  with the
requirements of the Year 2000 conversion. In addition, FIC Computer Services has
purchased  certain  third-party  software  which is run on the  mainframe.  This
software has been  represented  by the vendor as being in  compliance  with Year
2000 requirements. Testing is currently being done on such third-party software,
which  testing is expected to be completed by September 1, 1999.  The  telephone
system,  which includes both PBX and voice mail systems,  has been tested by the
maintenance  provider  for that system and the Company has  received  assurances
that the telephone system is Y2K compliant.

With respect to non-centralized  systems (i.e., desktop computers),  the Company
has obtained  updated  software  releases  and new  hardware  designed to be Y2K
compliant according to the  representations of the vendors.  The Company expects
that the effort  needed to correct for Y2K problems on such systems will be less
time intensive than the effort needed to achieve  compliance for its centralized
systems.  The installation of such new PC hardware and software was commenced in
early 1999 and is expected to be completed by September 1, 1999.

                                      -14-

<PAGE>



The Company  also faces the risk that one or more of its  external  suppliers of
goods  or  services  ("third  party  providers")  will not be in a  position  to
properly  interact  with the  Company due to the  inability  of such third party
provider to resolve its own Y2K  issues.  Pursuant to the Plan,  the Company has
completed an inventory of its third party  provider  relationships.  In order to
assess  the Y2K  readiness  of such  third  party  providers,  the  Company  has
developed  and  forwarded a detailed  questionnaire  to such  providers.  As the
responses to the  questionnaires  are  received,  the Company will  evaluate the
overall Y2K readiness of its third party provider  relationships.  However,  the
Company does not have  sufficient  information  at the current time to determine
whether the computer  systems of its third party providers will be in compliance
with the Y2K requirements as the year 2000 approaches.

In the event that a major administrative system fails to operate properly due to
the Y2K  problem,  or the  Company  does  not  complete  the  necessary  systems
conversions  prior to January 1,  2000,  the  Company  has  developed  a plan to
respond to such a  contingency.  FIC  Computer  Services  has  assigned  certain
personnel to be members of an emergency  response team to resolve Y2K operations
problems. Additionally, insurance policies would be administered manually if the
necessary  systems  conversions  were not completed prior to January 1, 2000, or
subsequent Y2K operational  problems arise. Manual policy  administration  would
require  additional  personnel.   If  substantial  additional  personnel  become
necessary for manual policy administration,  the training and salary expenses of
such personnel  could  materially  affect the Company's  business and results of
operations.  The  Company is not able to  estimate  the  likelihood  that manual
administration  will be needed or the amount of any expense which it would incur
in connection with such manual administration.

Competition

There are many life and  health  insurance  companies  in the United  States.  A
significant  number of casualty  companies also market health insurance.  Agents
placing  insurance   business  with  ILCO's  life  insurance   subsidiaries  are
compensated  on  a  commission  basis.   However,   some  companies  pay  higher
commissions  and  charge  lower  premium  rates  and many  companies  have  more
substantial resources.

The principal cost and competitive  factors that affect the Company's ability to
sell its life insurance and annuity  products on a profitable basis are: (1) the
general  level of  premium  rates for  comparable  products;  (2) the  extent of
individual policy holder services required to service each product category; (3)
general  interest  rate levels;  (4)  competitive  commission  rates and related
marketing costs; (5) legislative and regulatory  requirements and  restrictions;
(6) the impact of competing insurance and other financial products;  and (7) the
condition of the regional and national economies.

Reinsurance and Reserves

Reinsurance Ceded:


                                      -15-

<PAGE>



In accordance with general  practices in the insurance  industry,  the Company's
insurance  subsidiaries  limit the  maximum net losses that may arise from large
risks by reinsuring with other carriers. Such reinsurance provides for a portion
of the  mortality  risk to be retained (the  "Retention")  with the excess being
ceded to a reinsurer at a premium set forth in a schedule based upon the age and
risk  classification  of the  insured.  The  reinsurance  treaties  provide  for
allowances that help the Company's insurance  subsidiaries offset the expense of
writing  new  business.  Investors-IN  generally  retains  the first  $60,000 to
$100,000  of risk on the  life of any  individual,  depending  upon  the type of
coverage being  written.  Investors-NA  generally  retains the first $100,000 to
$250,000  of  risk on the  life  of any  individual,  depending  on the  type of
coverage being issued.

Investors-NA  maintains a bulk reinsurance treaty,  under which it reinsured all
of its risks  under  accidental  death  benefit  policies.  The  treaty was most
recently renegotiated with the current reinsurer in January, 1997.

As discussed above (see "Principal  Products"),  in December,  1997, ILCO's life
insurance  subsidiaries entered into a reinsurance treaty under which all of the
contractual obligations and risks under individual accident and health insurance
policies  were  assumed  by a third  party  reinsurer.  In  connection  with the
transaction,  the total amount of net reserves  transferred by the  subsidiaries
was $6,327,504. In addition to the transfer of reserves, the life companies paid
the reinsurer  $1,037,150 in connection with the  transaction,  which amount was
accounted for as an expense for the year ended December 31, 1997.

Although  reinsurance does not eliminate the exposure of the Company's insurance
subsidiaries   to  losses  from  risks  insured,   the  net  liability  of  such
subsidiaries will be limited to the portion of the risk retained,  provided that
the reinsurers meet their contractual obligations.

The  Company's  insurance  subsidiaries  carry  reserves  on their books to meet
future obligations under their outstanding insurance policies. Such reserves are
believed  to be  sufficient  to meet policy  obligations  as they mature and are
calculated using assumptions for interest,  mortality,  expenses and withdrawals
in effect at the time the policies were issued.

Reinsurance Assumed:

In 1995,  Investors-NA  entered into a  reinsurance  agreement  with Family Life
pertaining to universal life insurance  written by Family Life. The  reinsurance
agreement is on a  co-insurance  basis and applies to all covered  business with
effective dates on and after January 1, 1995. The agreement applies to only that
portion  of the face  amount of the  policy  which is less than  $200,000;  face
amounts of  $200,000  or more are  reinsured  by Family  Life with a third party
reinsurer.  In 1996,  Investors-NA  entered into a  reinsurance  agreement  with
Family  Life,  pertaining  to  annuity  contracts  written by Family  Life.  The
agreement  applies  to  contracts  written on or after  January  1, 1996.  These
reinsurance arrangements reflect management's plan to develop universal life and
annuity business at Investors-NA,  with Family Life concentrating on the writing
of term life insurance products.


                                      -16-

<PAGE>



FIC's Acquisition of Control of the Company

In January 1985, FIC acquired 26.53% of ILCO's common stock. FIC and Family Life
subsequently  acquired  additional shares of ILCO's common stock and as of March
15, 1999, FIC owned, directly and indirectly through Family Life,  approximately
45% of the outstanding  shares of ILCO's common stock. Prior to October 1, 1998,
FIC held  options to acquire up to  1,702,155  additional  shares of ILCO Common
Stock.  As a result of the final repayment on ILCO's Senior Loan (see discussion
under the caption "Senior Loan") on September 30, 1998, FIC's options to acquire
shares of ILCO's Common Stock expired.


FIC's Acquisition of Family Life

After FIC acquired control of ILCO,  FIC's primary  involvement in the insurance
industry  was  its  indirect  investment,  through  ILCO,  in  ILCO's  insurance
subsidiaries. In June 1991, FIC acquired Family Life Insurance Company, ("Family
Life"), based in Seattle, Washington, from Merrill Lynch Insurance Group, Inc.

Family  Life  underwrites  and  sells  mortgage  protection  life  insurance  to
customers who are mortgage  borrowers from financial  institutions  where Family
Life has marketing relationships. Family Life distributes its insurance products
primarily through a national career sales force in 49 states and the District of
Columbia.

The $114 million purchase price for Family Life and an additional $5 million for
transaction costs,  working capital and other related purposes were financed by:
(a) a $50  million  senior loan  provided  by a group of banks,  (b) $44 million
subordinated  notes issued to the seller and its  affiliates and (c) $25 million
senior subordinated notes issued to Investors-CA and Investors-NA.  In addition,
FIC granted to Investors-CA and Investors-NA nontransferable options to purchase
up to a total of 9.9% of FIC's  common  stock at a price of  $10.50  per  share,
equivalent to the then current  market  price,  subject to adjustment to prevent
dilution.  As a result  of the  five-for-one  stock  split  implemented  by FIC,
effective in November,  1996,  the exercise  price of the options was changed to
$2.10 per share.  The initial terms of the option provided for their  expiration
on June 12, 1998,  if not  previously  exercised.  In  connection  with the 1996
amendments to the subordinated  loans held by Investors-NA,  the expiration date
of the options was extended to September 12, 2006.  For a discussion of the 1996
amendments,  see Item 13, "Certain  Relationships and Related  Transactions with
Management" . In July 1993,  the  subordinated  notes held by the seller and its
affiliates  were  prepaid.  The  primary  source of the funds used to prepay the
subordinated  debt was a new  subordinated  loan of $34.5 million  obtained from
Investors-NA. See Item 13.

Senior Loan

The Senior  Loan of ILCO was  originally  arranged in  connection  with the 1988
acquisition of  Investors-NA  and  Investors-CA.  In January,  1993, the Company
refinanced its Senior Loan. That

                                      -17-

<PAGE>



transaction  was done in  connection  with the  prepayment  of the  subordinated
indebtedness  and the purchase of warrants  which had been issued as part of the
financing of the 1988 acquisitions. The terms of the amended and restated credit
facility  are  substantially  the same as the terms and  provisions  of the 1988
senior loan. The maturity  date,  which had been December 31, 1996, was extended
to July 1, 1998 for the  Senior  Loan.  The  average  interest  rate paid by the
Company on its Senior Loan was  approximately  7.76% during  1996,  7.68% during
1997 and 7.63% during 1998.

In February,  1995,  the Company  borrowed an  additional  $15 million under the
Senior Loan to help finance the  acquisition of  Investors-IN,  and the maturity
date of the Senior Loan was further extended to July 1, 1999. As of December 31,
1995, the outstanding  principal  balance of ILCO's senior loan  obligations was
$59.4 million.  In January,  1996, the Company made a scheduled  payment of $4.5
million  under its Senior Loan. In March,  1996,  the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At that same time, the
Company made a payment of $941,000, an additional payment under the terms of the
loan applied to the principal  balance.  On April 1, 1996, an optional principal
payment in the amount of $15 million was made,  which  resulted in advancing the
scheduled  payoff date of the Senior Loan to April 1, 1998. In July,  1996,  the
Company  made the  principal  payment for October  1st ($4.5  million),  plus an
optional  principal payment of $0.5 million.  In connection with the acquisition
of State Auto Life  Insurance  Company in July,  1997, the Senior Loan agreement
was modified to extend the maturity date to October 1, 1998.

As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million,  which reflected the prepayment by the Company of
the payment originally  scheduled for January 1, 1998. A regular payment, in the
amount of $3.7  million,  was made on April 1, 1998 and a prepayment of the July
1, 1998 installment,  in the amount of $3.7 million,  was made on June 30, 1998.
The  outstanding  principal  balance of ILCO's senior loan  obligations was $3.6
million at June 30, 1998. The final  installment  on the senior loan  obligation
scheduled  for October 1, 1998,  was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged  effective September 30,
1998.


Regulation

General.  The Company's  insurance  subsidiaries  are subject to regulation  and
supervision  by the  states in which  they are  licensed  to do  business.  Such
regulation is designed  primarily to protect policy owners.  Although the extent
of regulation  varies by state, the respective state insurance  departments have
broad administrative  powers relating to the granting and revocation of licenses
to transact business, licensing of agents, the regulation of trade practices and
premium rates, the approval of form and content of financial  statements and the
type and character of investments.

These laws and  regulations  require the  Company's  insurance  subsidiaries  to
maintain  certain minimum surplus levels and to file detailed  periodic  reports
with the  supervisory  agencies  in each of the states in which they do business
and their business and accounts are subject to examination

                                      -18-

<PAGE>



by such  agencies  at any  time.  The  insurance  laws  and  regulations  of the
domiciliary  states of the Company's  insurance  subsidiaries  require that such
subsidiaries be examined at specified intervals.

Investors-NA  and  Investors-IN  are domiciled in the states of  Washington  and
Indiana,  respectively.  In  December  1992,  Investors-NA  redomesticated  from
Pennsylvania to Washington, and Investors-CA merged into Investors-NA.  In June,
1993,  Standard  Life  merged  into  Investors-NA.   Prior  to  December,  1997,
Investors-IN  was  domiciled  in the State of New  Jersey.  In  December,  1997,
Investors-IN transferred its domicile to the State of Indiana.

A number of states regulate the manner and extent to which  insurance  companies
may test for acquired immune deficiency syndrome (AIDS) antibodies in connection
with the  underwriting of life insurance  policies.  To the extent  permitted by
law,  the  Company's  insurance   subsidiaries   consider  AIDS  information  in
underwriting  coverage and  establishing  premium  rates.  An  evaluation of the
financial  impact of future AIDS claims is extremely  difficult,  due in part to
insufficient  and conflicting data regarding the incidence of the disease in the
general  population  and the  prognosis  for the probable  future  course of the
disease.

Risk-Based  Capital   Requirements.   The  National   Association  of  Insurance
Commissioners  ("NAIC") has imposed Risk-Based  Capital ("RBC")  requirements to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance  risks  associated  with;  (i) asset  quality;  (ii) mortality and
morbidity;  (iii) asset and liability matching; and (iv) other business factors.
The  states  will use the RBC  formula  as an  early  warning  tool to  discover
potential weakly capitalized  companies for the purpose of initiating regulatory
action.  The RBC  requirements  are not  intended  to be a basis for ranking the
relative financial  strength of insurance  companies.  In addition,  the formula
defines a new minimum  capital  standard  which will  supplement  the prevailing
system of low fixed minimum capital and surplus requirements on a state-by-state
basis.

The RBC requirements  provide for four different levels of regulatory  attention
in those states that adopt the NAIC  regulations,  depending on the ratio of the
company's  Total  Adjusted  Capital  (which  generally  consist of its statutory
capital,  surplus and asset valuation  reserve) to its Authorized  Control Level
RBC. A "Company  Action Level Event" is triggered if a company's  Total Adjusted
Capital is less than 200% but  greater  than or equal to 150% of its  Authorized
Control  Level  RBC,  or if a negative  trend has  occurred  (as  defined by the
regulations)  and Total Adjusted Capital is less than 250% but more than 200% of
its Authorized  Control Level RBC. When a Company Action Level Event occurs, the
company  must submit a  comprehensive  plan to the  regulatory  authority  which
discusses  proposed  corrective  actions  to improve  its  capital  position.  A
"Regulatory  Action  Level Event" is  triggered  if a company's  Total  Adjusted
Capital is less than 150% but  greater  than or equal to 100% of its  Authorized
Control Level RBC. When a Regulatory  Action Level Event occurs,  the regulatory
authority  will perform a special  examination of the company and issue an order
specifying  corrective  actions that must be followed.  An  "Authorized  Control
Level  Event" is triggered if a company's  Total  Adjusted  Capital is less than
100% but greater than or equal to 70% of its  Authorized  Control Level RBC, and
the  regulatory  authority  may take any  action it deems  necessary,  including
placing the company under regulatory control. A "Mandatory Control Level

                                      -19-

<PAGE>



Event" is triggered if a company's  total  adjusted  capital is less than 70% of
its Authorized  Control Level RBC, and the  regulatory  authority is mandated to
place the company under its control.

Calculations  using the NAIC formula and the statutory  financial  statements of
the Company's  insurance  subsidiaries as of December 31, 1998 indicate that the
Total Adjusted Capital of each of the Company's insurance  subsidiaries is above
640% of its respective Authorized Control Level RBC.

Solvency Laws Assessments. The solvency or guaranty laws of most states in which
the  Company's  insurance  subsidiaries  do business  may require the  Company's
insurance  subsidiaries to pay assessments (up to certain  prescribed limits) to
fund  policyholder  losses or  liabilities  of insurance  companies  that become
insolvent.  Recent  insolvencies of insurance companies increase the possibility
that such  assessments  may be required.  These  assessments  may be deferred or
forgiven under most guaranty laws if they would threaten an insurer's  financial
strength and, in certain instances,  may be offset against future premium taxes.
The insurance  companies record the expense for guaranty fund assessments in the
period assessed.  The net amount of such assessment for the Company's  insurance
subsidiaries was approximately  $7,000 in the year ended December 31, 1998. That
amount is net of the amounts that can be offset  against  future  premium taxes.
The  likelihood and amount of any other future  assessments  cannot be estimated
and are beyond the control of the Company.

Surplus   Debentures  and  Dividends.   The  Company   receives   payments  from
Investors-NA  under the terms of two surplus debentures . The surplus debentures
were  originally  issued by Standard Life. Upon the merger of Standard Life into
Investors-NA,  the  obligations  of  the  surplus  debentures  were  assumed  by
Investors-NA.  Since  Investors-NA is domiciled in the State of Washington,  the
provisions of Washington  insurance law apply to the surplus  debentures.  Under
the provisions of the surplus  debentures and current law,  Investors-NA can pay
interest and principal on the surplus  debentures  without  having to obtain the
prior approval of the Washington  Insurance  Commissioner;  provided that, after
giving effect to such  payments,  the statutory  surplus of  Investors-NA  is in
excess of $10  million.  As of  December  31,  1998,  the  statutory  surplus of
Investors-NA  was  $68.2  million.   Investors-NA   does  give  five-days  prior
notification to the Washington  Insurance Department of each proposed payment on
the surplus debentures in accordance with an agreement between  Investors-NA and
the  Department.  ILCO  does not  anticipate  that  Investors-NA  will  have any
difficulty in making principal and interest payments on the surplus debentures.

Pursuant to the surplus  debentures,  Investors-NA paid to the Company principal
and interest on the surplus  debentures of $36,288,469  in 1996,  $14,093,711 in
1997 and $13,382,361 in 1998.

In addition to the payments under the terms of the Surplus Debentures,  ILCO has
received dividends from its insurance subsidiaries.  Washington's insurance code
includes the "greater of" standard for payment of dividends to shareholders, but
has requirements that prior  notification of a proposed dividend be given to the
Washington Insurance  Commissioner and that cash dividends may be paid only from
earned surplus.  Under the "greater of" standard,  an insurer may pay a dividend
in an

                                      -20-

<PAGE>



amount  equal to the  greater  of (i) 10% of  policyholder  surplus  or (ii) the
insurer's  net gain from  operations  for the previous  year. As of December 31,
1998,  Investors-NA  had earned surplus of $39.3 million.  Since the law applies
only to dividend  payments,  the ability of  Investors-NA  to make principal and
interest  payments under the Surplus  Debentures is not affected.  ILCO does not
anticipate that  Investors-NA  will have any difficulty in making  principal and
interest payments on the Surplus Debentures .

Investors-IN is domiciled in the State of Indiana.  Under the Indiana  insurance
code, a domestic insurer may make dividend  distributions  upon proper notice to
the  Department  of  Insurance,  as long as the  distribution  is  reasonable in
relation to adequate  levels of  policyholder  surplus and quality of  earnings.
Under Indiana law the dividend must be paid from earned  surplus.  Extraordinary
dividend  approval would be required where a dividend exceeds the greater of 10%
of  surplus  or the  net  gain  from  operations  for  the  prior  fiscal  year.
Investors-IN had earned surplus of $18.1 million at December 31, 1998.

Valuation  Reserves.  Commencing  in 1992,  the Mandatory  Securities  Valuation
Reserve ("MSVR") required by the NAIC for life insurance  companies was replaced
by a  mandatory  Asset  Valuation  Reserve  ("AVR")  which is  expanded to cover
mortgage loans, real estate and other investments.  During 1997, a change in the
NAIC's AVR  procedures  resulted  in a one-time  reduction  in the amount of the
reserves  held by  ILCO's  life  insurance  subsidiaries,  with a  corresponding
one-time increase in the amount of surplus. For Investors-NA,  the amount of the
increase in surplus was $2,395,000; for Investors-IN, the amount of the increase
in surplus was $590,000.  A new mandatory Interest  Maintenance Reserve ("IMR"),
designed to defer realized capital gains and losses due to interest rate changes
on fixed income  investments  and to amortize those gains and losses into future
income,  is  also  effective  for  1992.  Previously,   realized  capital  gains
attributable  to interest  rate  changes  were  credited to the MSVR and had the
effect  of  reducing  the  required  MSVR   contributions  of  ILCO's  insurance
subsidiaries. Effective in 1992, such realized capital gains are credited to the
IMR.  As a result  of these  changes,  management  believes  that the  Company's
insurance  subsidiaries are required to accrue greater aggregate asset valuation
reserves.  The combination of the AVR and IMR will affect statutory  capital and
surplus and may reduce the ability of the Company's  insurance  subsidiaries  to
pay dividends and make payments on the surplus debentures.

Insurance Holding Company Regulation.  Investors-NA and Investors-IN are subject
to regulation  under the insurance and  insurance  holding  company  statutes of
Washington and Indiana.  The insurance holding company laws and regulations vary
from   jurisdiction  to  jurisdiction,   but  generally  require  insurance  and
reinsurance  subsidiaries  of insurance  holding  companies to register with the
applicable  state  regulatory  authorities  and to file with  those  authorities
certain reports  describing,  among other information,  their capital structure,
ownership,  financial condition,  certain intercompany  transactions and general
business  operations.  The insurance holding company statutes also require prior
regulatory agency approval or, in certain circumstances, prior notice of certain
material  intercompany  transfers  of  assets  as well as  certain  transactions
between insurance companies, their parent companies and affiliates.


                                      -21-

<PAGE>



Under the  Washington and Indiana  insurance  holding  company laws,  unless (i)
certain  filings are made with the  respective  department  of  insurance,  (ii)
certain  requirements are met,  including a public hearing and (iii) approval or
exemption is granted by the  respective  insurance  commissioner,  no person may
acquire any voting security or security convertible into a voting security of an
insurance  holding  company,  such as the Company,  which  controls an insurance
company  domiciled in that state, or merge with such a holding company,  if as a
result of such  transaction  such person would  "control" the insurance  holding
company.  "Control" is presumed to exist if a person directly or indirectly owns
or controls 10% or more or the voting securities of another person.

Potential Federal Regulation. Although the federal government generally does not
directly  regulate the insurance  industry,  federal  initiatives  often have an
impact on the business.  Congress and certain federal agencies are investigating
the current  condition of the  insurance  industry  (encompassing  both life and
health and  property and casualty  insurance)  in the United  States in order to
decide  whether  some  form of  federal  role  in the  regulation  of  insurance
companies  would be appropriate.  Congress is currently  conducting a variety of
hearings relating in general to the solvency of insurers.  It is not possible to
predict the outcome of any such congressional activity nor the potential effects
thereof on the Company's insurance subsidiaries.

Congressional initiatives directed at repeal of the McCarran-Ferguson Act (which
exempts the  "business of  insurance"  from most  federal  laws,  including  the
antitrust  laws, to the extent it is subject to state  regulation)  and judicial
decisions   narrowing   the   definition   of   "business  of   insurance"   for
McCarran-Ferguson  Act purposes may limit the ability of insurance  companies in
general to share  information  with respect to  rate-setting,  underwriting  and
claims  management  practices.  Current and proposed  federal measures which may
also  significantly  affect the  insurance  industry  include  minimum  solvency
requirements  and  removal of  barriers  preventing  banks from  engaging in the
insurance business.

Federal Income Taxation

The Revenue Reconciliation Act of 1990 amended the Internal Revenue Code of 1986
to require a portion of the expenses incurred in selling  insurance  products to
be deducted over a period of years, as opposed to an immediate  deduction in the
year incurred.  Since this change only affects the timing of the deductions,  it
does not  affect  tax  expense as shown on the  Company's  financial  statements
prepared in accordance with GAAP. However,  the change will increase the tax for
statutory  accounting  purposes  in the  first  few  years,  which  will  reduce
statutory  surplus and,  accordingly,  may decrease the amount of cash dividends
that Investors-NA can pay to the Company. For the years ended December 31, 1996,
1997 and 1998,  the  decreases  in the  current  income  tax  provisions  of the
Company's insurance  subsidiaries due to this change were $90,413,  $269,633 and
$253,411,  respectively.  The  change has a  negative  tax effect for  statutory
accounting   purposes  when  the  premium  income  of  the  Company's  insurance
subsidiaries increases,  but has a positive tax effect when their premium income
decreases.



                                      -22-

<PAGE>



                               Segment Information

The  principal  operations  of the  Company's  insurance  subsidiaries  are  the
underwriting of life insurance and annuities.  Accordingly,  no separate segment
information  is required to be provided  by the  Registrant  for the  three-year
period ending December 31, 1998.


Item 2. Properties

The  Registrant's  headquarters  are  currently  located at Austin  Centre,  701
Brazos,  Suite 1400,  Austin,  Texas.  Investors-NA  purchased Austin Centre, an
office-hotel  property in downtown Austin in August 1991 for a purchase price of
$31,275,000 from an unrelated  seller that had previously  acquired the property
through foreclosure.  In September 1995, Investors-NA entered into a contract to
sell Austin Centre to an Austin-based real estate investment firm for a purchase
price of  $62.675  million,  less $1  million  to be paid to a  capital  reserve
account for the purchaser. The sale was consummated on March 29, 1996. A portion
of the sale  proceeds  equal to the amount  that  Investors-  NA  presently  had
invested in Austin Centre were  retained and  reinvested  by  Investors-NA.  The
balance  of the net  proceeds  of the  sale  were  used to  reduce  ILCO's  bank
indebtedness  by  approximately  $15 million.  Following  the sale of the Austin
Centre,  the Company and its affiliates  continued to occupy three floors of the
office space under a lease  arrangement.  The current  lease,  which was entered
into in May,  1997,  is for a five (5) year term ending in October,  2002,  with
options to renew for three successive five (5) year terms thereafter.

In January,  1995,  ILCO,  through  Investors-NA,  purchased,  as an  investment
property,  an office  building  project  known as  Bridgepoint  Office Square in
Austin,  Texas for a cash purchase price of $9.75 million. The property consists
of 20 acres of land with four office  building  sites and two parking  structure
sites.  The first phase of development of the property was completed in 1986 and
consists of a five-story  office  building  with 83,474  square feet of rentable
space and a 550-car parking garage.

In the fourth quarter of 1995, construction began on the second office building,
containing  approximately  109,000  rentable  square feet, and the other parking
garage  containing  approximately  871  spaces.  That phase of the  project  was
completed in September 1996. In March 1996,  construction commenced on the third
office building,  with approximately 79,000 rentable square feet of office space
and was completed in December,  1996.  Construction began on the fourth building
in July 1996,  and was completed in July,  1997.  The fourth  building  contains
approximately 92,459 rentable square feet.

On May  3,  1996,  Family  Life  Insurance  Company,  an  indirect,  100%  owned
subsidiary of FIC,  purchased a tract of land adjoining the  Bridgepoint  Office
Square tract for a cash purchase price of $1.3 million. The property consists of
7.1 acres of land with one office building site and one parking  structure site.
Family Life began  construction  of the fifth  building  (known as  "Bridgepoint
Five")

                                      -23-

<PAGE>



on the new site in January  1997.  Construction  of the  parking  garage and the
building shell was completed in October, 1997.

On November 24, 1997,  Investors-NA and Family Life entered into a contract with
Health and Retirement  Properties Trust, a Maryland real estate investment trust
(the "Purchaser") to sell their respective  interests in the Bridgepoint  Square
Office complex.  The aggregate  purchase price for the project was  $78,000,000.
The  transaction  closed on December 5, 1997.  The purchase  price was allocated
approximately  78.5% to  Investors-NA  and  21.5% to  Family  Life.  The sale of
Bridgepoint   Office  Square  resulted  in  a  net  profit  to  Investors-NA  of
approximately $14.0 million ($9.1 million after tax) that was included in ILCO's
fourth quarter earnings for the period ended December 31, 1997. For Family Life,
the sale  resulted in a net profit of  approximately  $4.5 million ($3.2 million
after tax) that was  included in FIC's  fourth  quarter  earnings for the period
ended December 31, 1997.

On October 29, 1998, Investors-NA purchased two adjoining tracts of land located
in Austin,  Texas totaling 47.995 acres. The aggregate  purchase price for these
tracts was $8.1 million. Prior to the closing, Investors-NA obtained approval of
Site  Development  Permit  from  the City of  Austin  for the  tracts.  The Site
Development  Permit  allows  for the  construction  of  seven  office  buildings
totaling  600,000  square  feet,  with  associated  parking,  drives and related
improvements. The initial phase of the project ("Phase One") will consist of two
office  buildings,  associated  parking  and the  infrastructure  for the entire
project,  which is  known  as River  Place  Pointe.  Construction  on Phase  One
commenced during the first quarter of 1999.

ILCO leases a building located at 40 Parker Road,  Elizabeth,  New Jersey.  This
building,  which was  formerly the  Company's  headquarters  building,  contains
approximately  41,000  square feet of office space.  The  remaining  term of the
lease is 7 years,  and the lease calls for a minimum base rental of $450,000 per
annum.  The lease provides that all costs  including,  but not limited to, those
for maintenance,  repairs, insurance and taxes be borne by ILCO. The Company has
sub-leased the space in the property to third parties.

Investors-IN  owns three  buildings  which are  adjacent  to the 40 Parker  Road
building. One building, which is leased to third parties, contains approximately
3,500 square feet of space.  The second building  contains  approximately  2,500
square feet of space and is leased to persons who perform  maintenance  services
for  Investors-IN's  and ILCO's properties in Elizabeth,  New Jersey.  The third
building,  purchased during 1985,  contains  approximately  3,500 square feet of
space, and is partially leased to third parties .

Investors-NA owns an office building, located at 206 West Pearl Street, Jackson,
Mississippi.  This  building is 68 years old and contains  approximately  85,000
square feet (65,000 net  rentable  square  feet) of office  space.  Investors-NA
currently  occupies a nominal  portion of the space in this  property and leases
space to various commercial tenants.


                                      -24-

<PAGE>



The Company  believes that its  properties and leased space are adequate to meet
its foreseeable requirements.


Item 3. Legal Proceedings

The Company and  Investors-NA  are  defendants  in a lawsuit  which was filed in
October, 1996, in Travis County, Texas. CIGNA Corporation, an unrelated company,
is also a named  defendant in the lawsuit.  The named  plaintiffs in the suit (a
husband and wife),  allege that the universal  life  insurance  policies sold to
them by INA Life Insurance  Company (a company which was merged into  Investors-
NA  in  1992)  utilized  unfair  sales  practices.  The  named  plaintiffs  seek
reformation  of the  life  insurance  contracts  and an  unspecified  amount  of
damages.  The named plaintiffs also seek a class action as to similarly situated
individuals. No certification of a class has been granted as of the date hereof.
The Company  believes  that the suit is without  merit and intends to vigorously
defend this matter.

In August,  1997,  another  individual  filed a similar action in Travis County,
Texas against the corporate entities  identified above. The lawsuit involves the
same type of policy and includes  allegations which are substantially  identical
to the  allegations  in the first action.  The named  plaintiff also seeks class
certification.  The  Company  believes  that  the  court  would  consider  class
certification  with  respect  to only one of these  actions.  The  Company  also
believes that this action is without merit and intends to vigorously defend this
matter.


Item 4. Submission of Matters to a Vote of Security Holders

No matter  was  submitted  during the  fourth  quarter of the fiscal  year ended
December 31, 1998 to a vote of security holders.




                                      -25-

<PAGE>




                                     PART II

Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters

A. Market Information

The following  table sets forth the quarterly  high and low sales prices for the
Company's  Common Stock in The Nasdaq  Small-Cap  Market for 1998 and 1997.  The
quotations set forth below have not been adjusted to give retroactive  effective
to the stock  dividend (one share for each issued and  outstanding  share) which
was paid on March 17, 1999.

                                      Prices
                             High              Low  

1998:

1st Quarter. . . . . . .     $ 23.00         $18.75
2nd Quarter. . . . . . .       27.813         22.00
3rd Quarter. . . . . . .       27.00          19.50
4th Quarter. . . . . . .       21.00          17.25

1997:

1st Quarter. . . . . . .     $ 15.00         $13.00
2nd Quarter. . . . . . .       15.00          12.25
3rd Quarter. . . . . . .       20.375         14.75
4th Quarter. . . . . . .       24.25          19.00

The Common Stock of the Company is traded in The Nasdaq Small-Cap Market (NASDAQ
Symbol:  ILCO).   Quotations  are  furnished  by  the  National  Association  of
Securities Dealers Automated Quotation System (NASDAQ).

B. Holders

The  approximate  number of record holders of the Common Stock of the Registrant
as of March 15, 1999 was 1,456.

C. Dividends

No dividend was declared or paid by the Company during 1996, 1997 or 1998. Under
the terms of its Senior Loan the Company was not permitted to declare or pay any
dividends on its Common

                                      -26-

<PAGE>



Stock during the loan term. As discussed above, under the caption "Senior Loan",
the Senior Loan of the Company was fully repaid on September 30, 1998.

The ability of an insurance  holding company,  such as ILCO, to pay dividends to
its shareholders may be limited by the company's  ability to obtain revenue,  in
the  form  of  dividends  and  other  payments,  from  its  operating  insurance
subsidiaries.  The right of such  subsidiaries  to pay  dividends  is  generally
restricted  by the  insurance  laws of  their  domiciliary  states.  See Item 1.
Business Regulation - Surplus Debentures and Dividends.


Item 6. Selected Financial Data (in thousands, except per share data.)
<TABLE>

                                            Years Ended December 31,
<S>                           <C>         <C>          <C>           <C>         <C>   

                             1998         1997         1996          1995        1994

Revenues .............   $  109,462   $  127,683   $  138,244   $  122,390   $  114,842
Benefits & Expenses ..       91,876       96,081       96,801      105,907       99,142

Income from operations       17,586       31,602       41,443       16,483       15,700
Provisions for federal
income taxes .........        6,467       11,062       14,505        5,769        5,783


Net Income ...........   $   11,119   $   20,540   $   26,938   $   10,714   $    9,917

Common Stock and
Common Stock
Equivalents ..........        4,462        4,369        4,441        4,342        4,473
Net income per share
Basic ................   $     2.54   $     4.75   $     6.36   $     2.57   $     2.41
Diluted ..............   $     2.49   $     4.70   $     6.07   $     2.47   $     2.22

Cash Dividend ........          -0-          -0-          -0-          -0-          -0-
Long Term Debt .......          -0-   $   10,964   $   24,944   $   59,385   $   66,585

Total Assets .........   $1,350,248   $1,321,653   $1,263,942   $1,315,293   $1,148,994
</TABLE>

Net  income per share for the years  1994,  1995 and 1996 has been  restated  to
reflect the effect of FAS 128.


                                      -27-

<PAGE>



Item 7. Management's  Discussion and Analysis of Financial Condition and Results
     of Operations

For the year ended December 31, 1998,  ILCO's net income was $11,119,000  (basic
earnings  of $2.54 per common  share,  or diluted  earnings  of $2.49 per common
share) as compared to $20,540,000  (basic earnings of $4.75 per common share, or
diluted  earnings of $4.70 per common  share) in 1997,  and  $26,938,000  (basic
earnings  of $6.36 per common  share,  or diluted  earnings  of $6.07 per common
share)  in  1996.   Earnings  per  share  are  stated  in  accordance  with  the
requirements of Financial  Accounting  Standard (FAS) No. 128, which establishes
two  measures  of  earnings  per share:  basic  earnings  per share and  diluted
earnings  per share.  Basic  earnings  per share is computed by dividing  income
available to common shareholders by the weighted average number of common shares
outstanding during the period.  Diluted earnings per share reflect the potential
dilution that would occur if securities or other contracts to issue common stock
were  converted or  exercised.  For the year 1996,  earnings per share have been
restated to reflect the effect of FAS No. 128.

Earnings  per share have not been  adjusted  to give  retroactive  effect to the
stock dividend (one share of common stock for each  outstanding  share of common
stock) which was paid on March 17, 1999.

                              Results of Operations

Net income from  continuing  operations  (excluding  the gain resulting from the
sale of Bridgepoint  Square Offices in 1997 and the sale of the Austin Centre in
1996, as described  below) was  $11,119,000  (basic earnings of $2.54 per common
share,  or  diluted  earnings  of $2.49 per  common  share)  for the year  ended
December  31,  1998,  as compared to  $11,443,000  (basic  earnings of $2.64 per
common share, or diluted  earnings of $2.62 per common share) for the year ended
December 31, 1997 and $11,650,000  (basic earnings of $2.75 per common share, or
diluted  earnings  of $2.62 per common  share) for the year ended  December  31,
1996.

Net  income  for  1997  includes  $9.1  million  resulting  from the sale of the
Bridgepoint  Square  Offices,  an office complex located in Austin,  Texas.  The
selling  price was $78  million,  which  was  allocated  approximately  78.5% to
Investors-NA  ($61.3  million).  The sale closed on December 5, 1997. As part of
the decision to sell the Bridgepoint properties,  the Company canceled its plans
to move its headquarters to one of the Bridgepoint  buildings and entered into a
new lease at the Austin Centre. Under the provisions of the lease,  Investors-NA
received  a payment  from the owner of the  Austin  Centre in the amount of $1.7
million.  That amount is included in net income for the year ended  December 31,
1997.

Net income for 1996 includes $15.3 million resulting from the sale of the Austin
Centre, a hotel/office complex,  located in Austin, Texas. The selling price was
$62.67  million,  less $1  million  paid to a capital  reserve  account  for the
purchaser. The sale closed on March 29, 1996.

The results for 1998  include,  for the period  beginning on June 30, 1998,  the
operations of Grinnell  Life  Insurance  Company.  Grinnell Life was acquired on
June 30, 1998,  through a subsidiary of ILCO, for an adjusted  purchase price of
$16.6 million. A portion of the purchase price ($12.37

                                      -28-

<PAGE>



million)  was paid by way of a dividend to the seller  immediately  prior to the
closing of the transaction; the balance of the purchase price was paid by ILCO's
subsidiary.  As part of the  transaction,  Grinnell Life was immediately  merged
with and into that subsidiary, with that subsidiary being the surviving entity.

The statutory earnings of the Company's insurance  subsidiaries,  as required to
be  reported to  insurance  regulatory  authorities,  before  interest  expense,
capital gains and losses,  and federal income taxes were $17,079,000 at December
31, 1998, as compared to $20,192,000  at December 31, 1997,  and  $21,965,000 at
December 31, 1996.  These  statutory  earnings are the source to provide for the
repayment of ILCO's indebtedness.

The  operating  strategy  of the  Company's  management  emphasizes  several key
objectives:  expense  management;  marketing of  competitively  priced insurance
products  which are designed to generate an acceptable  level of  profitability;
maintenance of a high quality portfolio of investment grade securities;  and the
provision of quality customer service.

Premium  income,  net of reinsurance,  for the year 1998 was $10.89 million,  as
compared  to $11.03  million in 1997,  and $ 9.98  million in 1996.  Reinsurance
premiums  ceded were $2.94 million in 1998, as compared to $2.59 million in 1997
and $1.71 million in 1996.  For the year 1997,  ceded  reinsurance  includes the
results of the sale of the accident and health and disability  income  insurance
business of the Company's life insurance subsidiaries. In December, 1997, ILCO's
life insurance subsidiaries entered into a reinsurance treaty under which all of
the  contractual  obligations and risks under accident and health and disability
income insurance  policies were assumed by a third party reinsurer.  These risks
and  contractual  obligations  were  sold  pursuant  to,  first,  a  coinsurance
reinsurance agreement.  Following applicable regulatory approvals, the reinsurer
will  assume  the  direct  obligations  of  the  companies,   on  an  assumption
reinsurance basis. The decision to dispose of this book of business was based on
management's  analysis  that the business  was not  generating  targeted  profit
objectives  and that the  products  were  not part of the core  business  of the
subsidiaries.  The sale permits the companies to focus on its primary business -
life insurance and annuity sales. In connection with the transaction,  the total
amount of net reserves  transferred by the  subsidiaries  was $6.33 million.  In
addition to the  transfer of reserves,  the life  companies  paid the  reinsurer
$1.04 million in connection with the transaction, which amount was accounted for
as an expense for the year ended  December 31, 1997.  In 1997,  the  transferred
business generated approximately $791,000 in annualized premiums.

Earned  insurance  charges  for the year  ended  December  31,  1998 were  $41.1
million, as compared to $40.9 million for 1997 and $42.24 million for 1996. This
source of revenues is related to the universal  life  insurance and annuity book
of business of Investors-NA.

In 1995,  Investors-NA  entered into a  reinsurance  agreement  with Family Life
Insurance  Company (an  insurance  company  subsidiary  of Financial  Industries
Corporation and an affiliated company of Investors-NA),  pertaining to universal
life  insurance  written  by Family  Life.  The  reinsurance  agreement  is on a
co-insurance  basis and applies to all covered  business with effective dates on
and

                                      -29-

<PAGE>



after January 1, 1995.  The  agreement  applies to only that portion of the face
amount of the policy  which is less than  $200,000;  face amounts of $200,000 or
more are  reinsured  by  Family  Life  with a third  party  reinsurer.  In 1996,
Investors-NA entered into a reinsurance  agreement with Family Life,  pertaining
to annuity  contracts written by Family Life. The agreement applies to contracts
written on or after  January 1, 1996.  These  reinsurance  arrangements  reflect
management's   plan  to  develop   universal   life  and  annuity   business  at
Investors-NA,  with  Family  Life  concentrating  on the  writing  of term  life
insurance products.

Interest expense was $0.7 million for the year 1998, as compared to $1.7 million
for the year  1997,  and  $2.8  million  for the  year  1996.  The  decrease  is
attributable to a reduction in the average  principal balance of the Senior Loan
from $33.7  million for the year ending  December 31, 1996 to $18.5  million for
the year ending  December 31, 1997 and $5.4 million for the year ending December
31,  1998,  as well as a decrease  in the average  rate of interest  paid on the
senior loan (7.63% for the year 1998, as compared to 7.68% for the year 1997 and
7.76% for the year 1996).

The  decline in  long-term  interest  rates  during  1998,  which was related to
general economic conditions,  had a positive effect upon the market value of the
fixed maturities available for sale segment of the portfolio. As of December 31,
1998,  the market value of the fixed  maturities  available for sale segment was
$450.15  million as  compared to an  amortized  cost of $435.13  million,  or an
unrealized  gain of $15.02  million.  The net of tax effect of this increase has
been recorded as an increase in shareholders' equity. There is no assurance that
this unrealized gain will be realized in the future.



During 1998, the lapse rate with respect to universal  life  insurance  policies
decreased slightly from the lapse rate experienced in 1997. The rate in 1998 was
7.3 %, as compared to 8.9 % in 1997.  The lapse rate with respect to traditional
(non-universal)   life  insurance   policies  also  decreased  from  the  levels
experienced  in 1997. The rate in 1998 was 7.1% as compared to 8.9% in 1997. The
lapse  rates  experienced   during  the  1998  period  were  within  the  ranges
anticipated by management.


                        Liquidity and Capital Resources:

ILCO is a holding company whose principal  assets consist of the common stock of
Investors Life Insurance Company of North America and its subsidiary - Investors
Life  Insurance  Company of Indiana  (formerly  InterContinental  Life Insurance
Company).  ILCO's primary source of funds consists of payments under two Surplus
Debentures from Investors-NA.

As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million,  which reflected the prepayment by the Company of
the payment originally  scheduled for January 1, 1998. A regular payment, in the
amount of $3.7  million,  was made on April 1, 1998 and a prepayment of the July
1, 1998 installment, in the amount of $3.7 million, was made on June

                                      -30-

<PAGE>



30, 1998. The outstanding  principal  balance of ILCO's senior loan  obligations
was $3.6  million at June 30,  1998.  The final  installment  on the senior loan
obligation  scheduled for October 1, 1998, was prepaid on September 30, 1998. As
a result,  the senior loan  obligation  of ILCO was fully  discharged  effective
September 30, 1998.

ILCO's  principal  source of  liquidity  consists  of the  periodic  payment  of
principal  and  interest by  Investors-NA,  pursuant to the terms of the Surplus
Debentures.  The Surplus  Debentures  were  originally  issued by Standard  Life
Insurance  Company and their terms were  previously  approved by the Mississippi
Insurance Commissioner.  Upon the merger of Standard Life into Investors-NA, the
obligations  of the  Surplus  Debentures  were  assumed by  Investors-NA.  As of
December 31, 1998, the outstanding  principal balance of the Surplus  Debentures
was  $4.5  million  and  $11.4  million,  respectively.  Since  Investors-NA  is
domiciled in the State of Washington, the provisions of Washington insurance law
apply to the Surplus Debentures.  Under the provisions of the Surplus Debentures
and current law, no prior approval of the Washington  Insurance  Commissioner is
required  for   Investors-NA  to  pay  interest  or  principal  on  the  Surplus
Debentures;  provided that, after giving effect to such payments,  the statutory
surplus of  Investors-NA  is in excess of $10  million  (the  "surplus  floor").
However,  Investors-NA  has  voluntarily  agreed with the  Washington  Insurance
Commissioner  that it will provide at least five days advance notice of payments
which it will make under the surplus  debenture.  As of December 31,  1998,  the
statutory surplus of Investors-NA was $68.2 million, an amount  substantially in
excess of the surplus  floor.  The funds  required by  Investors-NA  to meet its
obligations  to the  Company  under  the  terms of the  Surplus  Debentures  are
generated  from  operating   income  generated  from  insurance  and  investment
operations.

In addition to the payments under the terms of the Surplus Debentures,  ILCO has
received dividends from its life insurance subsidiaries.  Washington's insurance
code   includes   the   "greater  of"  standard  for  payment  of  dividends  to
shareholders,  but has a  requirement  that  prior  notification  of a  proposed
dividend  be given  to the  Washington  Insurance  Commissioner  and  that  cash
dividends  may be paid  only from  earned  surplus.  As of  December  31,  1998,
Investors-NA had earned surplus of $39.3 million.  Since the law applies only to
dividend  payments,  the ability of  Investors-NA to make principal and interest
payments under the Surplus Debentures is not affected.  ILCO does not anticipate
that  Investors-NA  will have any  difficulty  in making  principal and interest
payments on the Surplus Debentures for the foreseeable future.

Investors-IN is domiciled in the State of Indiana.  Under the Indiana  insurance
code, a domestic insurer may make dividend  distributions  upon proper notice to
the  Department  of  Insurance,  as long as the  distribution  is  reasonable in
relation to adequate  levels of  policyholder  surplus and quality of  earnings.
Under Indiana law the dividend must be paid from earned  surplus.  Extraordinary
dividend  approval would be required where a dividend exceeds the greater of 10%
of  surplus  or the  net  gain  from  operations  for  the  prior  fiscal  year.
Investors-IN had earned surplus of $18.1 million at December 31, 1998.

ILCO's net cash flow  provided by (used in)  operating  activities  was ($17.33)
million for the year ended  December 31, 1998,  as compared to $3.96 million for
the year ended December 31, 1997 and

                                      -31-

<PAGE>



($23.46)  million for the same period in 1996.  The change  between the 1997 and
1998  periods is  primarily  due to the  payments  made in  connection  with the
reinsurance of the health  insurance  business and the payment in 1998 of income
taxes relating to the gain on the sale of Bridgepoint Square Offices.

Management  believes that its cash, cash  equivalents and short term investments
are sufficient to meet the needs of its business and to satisfy debt service.

                                   Investments

As of December  31,  1998,  the book value of the  Company's  investment  assets
totaled $702.1  million,  as compared to $693.1 million as of December 31, 1997.
Total assets as of December 31, 1998 ($1.35 billion) increased from the level as
of December 31, 1997 ($1.32 billion).

The level of short-term  investments at the end of 1998 was $171.8  million,  as
compared to $164.6 million at the end of 1997.

Invested real estate and other  invested  assets  increased from $1.3 million at
December 31, 1997 to $10.03  million as of December 31, 1998.  This  increase is
related to the purchase by  Investors-NA  of the 47.995 acres of land in Austin,
Texas  for the  development  of the River  Place  Pointe  project.  The land was
purchased in October,  1998 by Investors-NA,  for an aggregate purchase price of
$8.1 million.  Prior to the closing of the transaction,  Investors-NA obtained a
Site  Development  Permit  for the  tracts  from  the City of  Austin.  The Site
Development  Permit  allows  for the  construction  of  seven  office  buildings
totaling  600,000  square  feet,  with  associated  parking,  drives and related
improvements.  Development of the initial phase of the project  commenced during
the first quarter of 1999; when  completed,  the first phase will consist of two
office  buildings,  a  parking  garage  and the  infrastructure  for the  entire
project.  Investors-NA plans to commence development of the additional stages of
the project following completion and leasing of Phase One.

The fixed  maturities  available for sale portion of invested assets at December
31,  1998 was  $450.15  million.  The  amortized  cost of the  fixed  maturities
available  for  sale  segment  as of  December  31,  1998 was  $435.13  million,
representing a net  unrealized  gain of $15.02  million.  This  unrealized  gain
principally  reflects  changes in  interest  rates from the date the  respective
investments  were  purchased.  To reduce the exposure to interest  rate changes,
portfolio  investments  are selected so that  diversity,  maturity and liquidity
factors approximate the duration of associated policyholder liabilities.

The  assets  held  by  ILCO's  life  insurance  subsidiaries  must  comply  with
applicable  state insurance laws and regulations.  In selecting  investments for
the portfolios of its life insurance subsidiaries,  the Company's emphasis is to
obtain  targeted  profit  margins,  while  minimizing  the  exposure to changing
interest rates.  This objective is implemented by selecting  primarily short- to
medium-term,  investment grade fixed income securities. In making such portfolio
selections, the Company

                                      -32-

<PAGE>



generally  does not select new  investments  which are  commonly  referred to as
"high yield" or "non- investment grade."

The Company's fixed maturities portfolio (including short-term investments),  as
of  December  31,  1998,  included a  non-material  amount  (0.6% of total fixed
maturities and short-term  investments) of debt securities  which, in the annual
statements  of the  companies as filed with state  insurance  departments,  were
designated under the National  Association of Insurance  Commissioners  ("NAIC")
rating system as "3" (medium  quality) or below. For the year ended December 31,
1997, the comparable percentage was 0.9%.

The  consolidated  balance sheets of the Company as of December 31, 1998 include
$47.65 million of "Notes receivable from affiliates",  represented by (i) a loan
of $22.5 million from Investors-NA to Family Life Corporation and a $2.5 million
loan from Investors-CA to Financial  Industries  Corporation (which is now owned
by Investors-NA as a result of the merger of Investors-CA into Investors-NA) and
$2.0 million of additions to the $2.5 million note made in  accordance  with the
terms of such  note;  these  loans  were  granted  in  connection  with the 1991
acquisition of Family Life Insurance Company by a wholly-owned subsidiary of FIC
(ii) a loan of $30 million by  Investors-NA to Family Life  Corporation  made in
July,  1993,  in  connection  with the  prepayment  by the FIC  subsidiaries  of
indebtedness  which had been  previously  issued to Merrill Lynch as part of the
1991 acquisition and (iii) a loan of $4.5 million by Investors-NA to Family Life
Insurance  Investment  Company made in July,  1993, in connection  with the same
transaction described above.

As of June 12, 1996, the provisions of the notes from  Investors-NA  to FIC, FLC
and FLIIC were  modified as follows:  (a) the $22.5  million note was amended to
provide for twenty  quarterly  principal  payments,  in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly  principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001;  beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458;  the final quarterly principal
payment is due on September  12, 2006;  the interest rate on the note remains at
9%,  (c) the $4.5  million  note was  amended  to  provide  for forty  quarterly
principal  payments,  in the amount of $24,531 each for the period  December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment  increases to $200,469;  the final
quarterly  principal  payment is due on September 12, 2006; the interest rate on
the note  remains at 9%, (d) the $2.5  million  note was amended to provide that
the  principal  balance  of  the  note  is  to be  repaid  in  twenty  quarterly
installments  of  $125,000  each,  commencing  December  12, 1996 with the final
payment due on September 12, 2001; the rate of interest  remains at 12%, (e) the
Master PIK note, which was issued to provide for the payment in kind of interest
due under the terms of the $2.5 million note prior to June 12, 1996, was amended
to provide that the principal  balance of the note ($1,977,119) is to be paid in
twenty  quarterly  principal  payments,  in the amount of  $98,855.95  each,  to
commence December 12, 1996 with the final payment due on September 12, 2001; the
interest rate on the note remains at 12%.

                                      -33-

<PAGE>



In December, 1998, FLIIC was dissolved. In connection with the dissolution,  all
of the assets and  liabilities  of FLIIC became the  obligations of FLIIC's sole
shareholder (FIC). Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.

The NAIC continued its rating of "3" to the "Notes  receivable from affiliates",
as amended.  These loans have not been included in the preceding  description of
NAIC rating percentages.

Management  believes that the absence of any material amounts of "high-yield" or
"non-investment  grade"  investments (as defined above) in the portfolios of its
life insurance  subsidiaries  enhances the ability of the Company to service its
debt, provide security to its policyholders and to credit relatively  consistent
rates of return to its policyholders.


                              Year 2000 Compliance

The  Company  and its  subsidiaries  utilize a  centralized  computer  system to
process policyholder records and financial information. In addition, the Company
uses non-centralized  computer terminals in connection with its operations.  The
software programs used in connection with these systems will be affected by what
is referred to as the "year 2000 problem". This refers to the limitations of the
programming  code in  certain  existing  software  programs  to  recognize  date
sensitive information as the year 2000 approaches.  Unless modified prior to the
year 2000,  such systems may not properly  recognize such  information and could
generate erroneous data or cause a system to fail to operate properly.

The Company has evaluated its centralized  computer  systems and has developed a
plan to reach year 2000 compliance.  A central feature of the Plan is to convert
most  of the  centralized  systems  to a  common  system  which  is  already  in
compliance  with year 2000  requirements.  The Company is in the process of this
systems conversion and anticipates that the project will be completed in advance
of the year 2000.

The Plan calls for a  conversion  of certain  systems  onto the  Company's  CK/4
System;  a  system  which  is  designed  to be Y2K  compliant  according  to the
representations  of the vendor.  Those systems  which are not converted  will be
upgraded  by  changing  individual  lines of  computer  code in order to  modify
current operating software such that it will become Y2K compliant.

Under the Plan,  the Company will utilize its own personnel and personnel of its
affiliated company, FIC Computer Services, Inc., acquire Y2K compliant operating
software,  and engage the  assistance of outside  consultants  to facilitate the
systems  conversions  and  modifications.  The Company is in the process of this
systems conversion and anticipates that the project will be completed in advance
of the year 2000.  The Company has increased  the budget for the  implementation
and  completion  of the Plan from the prior years  estimate.  As of December 31,
1997, the Company had budgeted approximately $470,000 for implementing the Plan.
Based on its current analysis, the Company

                                      -34-

<PAGE>



expects that the cost of implementing  and completing the Plan will result in an
after-tax  expense of  approximately  $587,000 for the three-year  (1997 - 1999)
conversion  period.  For the twelve month period  ended  December 31, 1998,  the
Company  has  incurred  an  after  tax  expense  of  approximately  $158,000  in
connection with the completion of the Plan. Between January 1, 1997 and December
31,  1998,  the  Company  has  expended  approximately  50.7% of the  three-year
expected  after-tax  cost discussed  above.  In the event that the Plan does not
achieve full compliance by the target dates, or if unforeseen  matters involving
Y2K appear before or after  January 1, 2000,  the Company will utilize the staff
of FIC  Computer  Services,  Inc. to identify  and resolve such issues as and if
they arise.

In order to continuously  evaluate the  effectiveness of the  modifications  and
conversions  made to the various  systems,  FIC  Computer  Services has acquired
testing  software to simulate  dates on or after January 1, 2000.  Additionally,
FIC Computer  Services  runs the systems  through  model office  cycles and also
conducts visual  inspections of screen displays to determine whether the systems
are functioning in a Y2K compliant manner.

As of March 1, 1999, FIC Computer Services, Inc. estimated that it had completed
the necessary conversions and modifications on the administrative  systems which
process  approximately  66 % of the  insurance  policies for the Company and its
subsidiaries.  This included the  conversion  of the ALIS System  (administering
approximately  42,000 active policies) to CK/4 in February,  1998, the System 38
(administering approximately 9,400 active policies) conversion in January, 1997,
the TI System (administering  approximately 5,240 active policies) conversion to
CK/4 in  July,  1998 and the  conversion  of the  Lifecomm-B  system  (which  is
responsible for  approximately  18,000 policies assumed after the acquisition of
State  Auto  Life)  in  February,1999.  The  conversion  of the  Life 70  system
(administering   approximately  16,120  active  policies  for  Investors-IN)  is
scheduled for completion in May,  1999. The conversion of the Lifecomm-A  system
(administering   approximately  62,410  active  policies  for  Investors-NA)  is
scheduled for  completion in September of 1999. The  modification  of one of the
Company's  smaller systems which administers  approximately  3,680 active credit
life policies was completed on schedule in December 1998. The  modification of a
smaller system which  administers  approximately  15,550 active  industrial life
policies is scheduled for completion in June of 1999.

The various  software  applications  described above are licensed to the Company
under agreements which permit the Company's  subsidiaries to process business on
its computer systems utilizing such software.

In 1997,  FIC Computer  Services,  Inc.  purchased  new  mainframe  hardware and
accompanying  operating  software,  which the vendor has  represented  to be Y2K
compliant.  FIC Computer  Services,  Inc. has  completed  the  installation  and
testing of such new  mainframe  hardware and software  for  compliance  with the
requirements of the Year 2000 conversion. In addition, FIC Computer Services has
purchased  certain  third-party  software  which is run on the  mainframe.  This
software has been  represented  by the vendor as being in  compliance  with Year
2000 requirements. Testing is currently being done on such third-party software,
which testing is expected to be completed by September

                                      -35-

<PAGE>



1, 1999. The telephone  system,  which includes both PBX and voice mail systems,
has been tested by the maintenance  provider for that system and the Company has
received assurances that the telephone system is Y2K compliant.

With respect to non-centralized  systems (i.e., desktop computers),  the Company
has obtained  updated  software  releases  and new  hardware  designed to be Y2K
compliant according to the  representations of the vendors.  The Company expects
that the effort  needed to correct for Y2K problems on such systems will be less
time intensive than the effort needed to achieve  compliance for its centralized
systems.  The installation of such new PC hardware and software was commenced in
early 1999 and is expected to be completed by September 1, 1999.

The Company  also faces the risk that one or more of its  external  suppliers of
goods  or  services  ("third  party  providers")  will not be in a  position  to
properly  interact  with the  Company due to the  inability  of such third party
provider to resolve its own Y2K  issues.  Pursuant to the Plan,  the Company has
completed an inventory of its third party  provider  relationships.  In order to
assess  the Y2K  readiness  of such  third  party  providers,  the  Company  has
developed  and  forwarded a detailed  questionnaire  to such  providers.  As the
responses to the  questionnaires  are  received,  the Company will  evaluate the
overall Y2K readiness of its third party provider  relationships.  However,  the
Company does not have  sufficient  information  at the current time to determine
whether the computer  systems of its third party providers will be in compliance
with the Y2K requirements as the year 2000 approaches.

In the event that a major administrative system fails to operate properly due to
the Y2K  problem,  or the  Company  does  not  complete  the  necessary  systems
conversions  prior to January 1,  2000,  the  Company  has  developed  a plan to
respond to such a  contingency.  FIC  Computer  Services  has  assigned  certain
personnel to be members of an emergency  response team to resolve Y2K operations
problems. Additionally, insurance policies would be administered manually if the
necessary  systems  conversions  were not completed prior to January 1, 2000, or
subsequent Y2K operational  problems arise. Manual policy  administration  would
require  additional  personnel.   If  substantial  additional  personnel  become
necessary for manual policy administration,  the training and salary expenses of
such personnel  could  materially  affect the Company's  business and results of
operations.  The  Company is not able to  estimate  the  likelihood  that manual
administration  will be needed or the amount of any expense which it would incur
in connection with such manual administration.


                                      -36-

<PAGE>




Cautionary  Statements  for  Purposes  of the "Safe  Harbor"  Provisions  of the
Private Securities Litigation Reform Act of 1995

Except  for  historical  factual  information  set  forth  in this  Management's
Discussion  and  Analysis,  certain  statements  made in this report are forward
looking and contain  information about financial results,  economic  conditions,
Y2K risks and other  risks and known  uncertainties.  The Company  cautions  the
reader that actual results could differ materially from those anticipated by the
Company, depending upon the eventual outcome of certain factors,  including: (1)
heightened  competition for new business,  (2)  significant  changes in interest
rates, (3) adverse  regulatory  changes  affecting the business of insurance and
(4) adverse changes in the Y2K readiness of the Company or its significant third
party providers.


                             Accounting Developments

In February  1997,  the  Financial  Accounting  Standards  Board  (FASB)  issued
Financial Accounting Standard (FAS) No. 128, "Earnings Per Share," which revises
the  standards  for computing  earnings per share  previously  prescribed by APB
Opinion No. 15, "Earnings Per Share." The Statement  establishes two measures of
earnings per share:  basic  earnings  per share and diluted  earnings per share.
Basic  earnings  per share is computed by dividing  income  available  to common
shareholders by the weighted average number of common shares  outstanding during
the period.  Diluted  earnings per share  reflects the  potential  dilution that
could  occur  if  securities  or other  contracts  to issue  common  stock  were
converted or exercised.  The Statement  requires dual  presentation of basic and
diluted  earnings per share on the face of the income statement for all entities
with potential dilutive  securities  outstanding.  The Statement also requires a
reconciliation  of the numerator and denominator of the basic earnings per share
computation to the numerator and  denominator of the diluted  earnings per share
computation.  The Statement is effective for interim and annual  periods  ending
after  December 15, 1997.  Earlier  application  is not  permitted.  However,  a
company  may  disclose  pro forma  earnings  per share  amounts  that would have
resulted if it had  applied  the  Statement  in an earlier  period.  The Company
adopted FAS 128 in its annual  financial  statements for the year ended December
31, 1997.

In June, 1997, the FASB issued FAS No. 130,  "Reporting  Comprehensive  Income",
which  establishes  standards for reporting and display of comprehensive  income
and its components in a financial  statement  with the same  prominence as other
financial statements. Comprehensive income is defined as net income adjusted for
changes in  stockholders'  equity resulting from events other than net income or
transactions related to an entity's capital instruments. The Company adopted FAS
130 effective January 1, 1998, with reclassification of financial statements for
earlier years.

In June,  1997,  the FASB issued FAS No. 131,  "Disclosure  About Segments of an
Enterprise and Related  Information",  which establishes standards for reporting
information  about  operating  segments.  Generally,  FAS No. 131 requires  that
financial information be reported on the basis that

                                      -37-

<PAGE>



it is used  internally for evaluating  performance.  The Company adopted FAS No.
131 effective January 1, 1998 and comparative  information for earlier years has
been restated.  This statement does not need to be applied to interim  financial
statements in the initial year of  application.  The adoption of FAS No. 131 did
not impact upon the Company's reporting of financial information.

In February,  1998, the FASB issued FAS No. 132,  "Employers'  Disclosures About
Pensions and Other  Postretirement  Benefits",  which revises current disclosure
requirements for employers' pension and other retiree benefits. FAS No. 132 does
not change the  measurement or  recognition  of pension or other  postretirement
benefit plans.  The Company adopted FAS No. 132 effective  January 1, 1998, with
the effect of such  adoption to be reflected in year-end  financial  statements.
The  adoption  of FAS No.  132 did not have a material  impact on the  Company's
results of operations, liquidity or financial position.

In December, 1997, the Accounting Standards Executive Committee issued Statement
of Position  ("SOP") 97-3,  "Accounting by Insurance and Other  Enterprises  for
Insurance-Related  Assessments",  which  provides  guidance  on  accounting  for
insurance-related  assessments.  The  Company  is  required  to adopt  SOP 97-3,
effective January 1, 1999.  Previously issued financial statements should not be
restated  unless the SOP is adopted  prior to the  effective  date and during an
interim  period.  The  adoption  of SOP 97-3 is not  expected to have a material
impact on the Company's results of operations, liquidity or financial position.

In  June,  1998,  the  FASB  issued  FAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities",  which establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  FAS No. 133 is applicable to financial  statements for all
fiscal  quarters of fiscal years  beginning  after June 15, 1999. As the Company
does not have significant  investments in derivative financial instruments,  the
adoption of FAS 133 does not have a material impact on the Company's  results of
operations, liquidity or financial position.


Item 7A.  Quantitative and Qualitative Disclosures About Market Risk

General:

ILCO's principal assets are financial  instruments,  which are subject to market
risks.  Market risk is the risk of loss arising  from adverse  changes in market
rates and prices,  principally  interest rates on fixed rate investments.  For a
discussion of the  Company's  investment  portfolio  and the  management of that
portfolio to reflect the nature of the underlying  insurance  obligations of the
Company's  insurance   subsidiaries,   please  refer  to  the  section  entitled
"Investment of Assets" in Item I of this report and the information set forth in
"Management's  Discussion  and Analysis of Financial  Condition and Operations -
Investments".


                                      -38-

<PAGE>



The  following is a discussion of the Company's  primary  market risk  sensitive
instruments.  It should be noted that this  discussion has been developed  using
estimates  and  assumptions.  Actual  results may differ  materially  from those
described below.  Further,  the following  discussion does not take into account
actions which could be taken by management in response to the assumed changes in
market rates. In addition, the discussion does not take into account other types
of risks which may be involved in the business  operations of the Company,  such
as the reinsurance recoveries on reinsurance treaties with third party insurers.

The primary market risk to the Company's  investment  portfolio is interest rate
risk. The Company does not use derivative financial instruments.

Interest Rate Risk:

Assuming an immediate  increase of 100 basis points in interest  rates,  the net
hypothetical  loss in fair market  value  related to the  financial  instruments
segment of the  Company's  balance  sheet is  estimated  to be $17.1  million at
December 31, 1998 and $25.9  million at December  31, 1997.  For purposes of the
foregoing  estimate,  the following  categories  of the  Company's  fixed income
investments  were taken into  account:  (i) fixed  maturities,  including  fixed
maturities  available  for sale,  (ii)  short-term  investments  and (iii) notes
receivable from  affiliates.  The market value of such assets was $672.6 million
at December 31, 1998 and $676.3 million at December 31, 1997.

The fixed income  investments  of the Company  include  certain  mortgage-backed
securities.  The market value of such  securities was $250.8 million at December
31, 1998 and $299.7 million at December 31, 1997. Assuming an immediate increase
of 100 basis points in interest  rates,  the net  hypothetical  loss in the fair
market value related to such mortgage-backed  securities is estimated to be $7.1
million at December 31, 1998 and $14.0 million at December 31, 1997.

Separate account assets have not been included,  since gains and losses on those
assets generally  accrue to the  policyholders.  The hypothetical  effect of the
interest  rate risk on fair values was  estimated  by  applying a commonly  used
model.  The model  projects  the impact of interest  rate  changes on a range of
factors, including duration and potential prepayment.


Item 8. Financial Statements and Supplementary Data

The following  Financial  Statements of ILCO and its  consolidated  subsidiaries
have been filed as part of this report:

1.   Report of PricewaterhouseCoopers LLP, Independent Accountants,  dated March
     26, 1999.

2.   Consolidated Balance Sheets, as of December 31, 1998 and December 31, 1997.

3.   Consolidated  Statements  of Income for the years ended  December 31, 1998,
     1997 and 1996.

                                      -39-

<PAGE>




4.   Consolidated  Statements of Changes in  Shareholders'  Equity for the years
     ended December 31, 1998, 1997 and 1996.

5.   Consolidated  Statements  of Cash Flows for the years  ended  December  31,
     1998, 1997 and 1996.

6.   Notes to Consolidated Financial Statements.


Item 9.  Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
     Financial Disclosure

No independent  accountant who audited the Registrant's financial statements has
resigned or been dismissed during the two most recent fiscal years.

                                      -40-

<PAGE>



                                    PART III

Item 10.  Directors and Executive Officers of Registrant

         (a) Directors of the Registrant

The names and ages of the current  directors of the Registrant,  their principal
occupations  or employment  during the past five years and other data  regarding
them are set forth below.  All of the directors  were elected at the 1998 annual
shareholders  meeting.  The data supplied below is based on information provided
by the  directors,  except  to  the  extent  that  such  data  is  known  to the
Registrant.
                                       Director
 Name                       Age        Director  Principal  Occupation
                                         Since   and Other  Information  

Robert A.Bender             45           1997   Director of ILCO since  October,
                                                1997.  Vice President of Family
                                                Life Insurance Company since 
                                                January 1997.  Vice President of
                                                Investors Life Insurance Company
                                                of North America since  January
                                                1997.  Vice President of 
                                                Investors-IN,  formerly known as
                                                InterContinental  Life Insurance
                                                Company since January 1997. 
                                                Assistant Vice  President of
                                                Investors Life Insurance Company
                                                of North America form February 
                                                1994 to January 1997.  Assistant
                                                Vice  President of Investors-
                                                Indiana  from February 1994 to 
                                                January 1997.  Assistant Vice 
                                                President of Investors- IN, 
                                                formerly known as 
                                                InterContinental Life Insurance
                                                Company from February 1994 to 
                                                January 1997. Assistant Vice 
                                                President of Family Life 
                                                Insurance Company from February
                                                1994 to January 1997.  Retired
                                                from 22 years of service in the
                                                U.S. Army in February 1994.
 

                                      -41-

<PAGE>




Jeffrey H. Demgen             46         1995   Director of FIC since May 1995. 
                                                Vice President of FIC since 
                                                August 1996.  Vice President and
                                                Director of ILCO since August 
                                                1996.  Director of FIC since May
                                                1995.  Executive Vice President
                                                and Director of Family Life
                                                Insurance Company since August 
                                                1996.  Senior Vice President and
                                                Director of Family Life 
                                                Insurance Company from October
                                                1992 to August 1996.  Executive
                                                Vice President and Director of
                                                Investors Life Insurance Company
                                                of North America since August
                                                1996.  Senior Vice President and
                                                Director of Investors Life 
                                                Insurance Company of North 
                                                America from October 1992 to 
                                                June 1995. Executive Vice 
                                                President of Investors-IN, 
                                                formerly known as 
                                                InterContinental Life Insurance
                                                Company since August 1996.
                                                Senior Vice President of
                                                Investors-IN, formerly known as
                                                InterContinental Life Insurance
                                                Company from October 1992 to 
                                                June 1995.  Executive Vice 
                                                President and Director of 
                                                Investors-Indiana from August 
                                                1996 to December 1997.  Senior
                                                Vice President of United 
                                                Insurance Company of America
                                                from September 1984 to July 1992

Theodore A. Fleron          59           1991   Vice President and Director of 
                                                ILCO since May 1991. Assistant
                                                Secretary since June 1990.  Vice
                                                President and  Director  of FIC
                                                since August 1996.  Senior  Vice
                                                President,  General Counsel,
                                                Assistant Secretary and Director
                                                of Investors Life Insurance  
                                                Company  of North America  and 
                                                Investors-IN, formerly known  as
                                                InterContinental Life Insurance
                                                Company since July 1992. General
                                                Counsel, Assistant Secretary and
                                                Director of  Investors  Life
                                                Insurance  Company  of North
                                                America and  Investors-  IN,
                                                formerly known as
                                                InterContinental Life Insurance
                                                Company from January 1989 to 
                                                July 1992.Senior Vice President,
                                                General  Counsel,   Director
                                                and  Assistant  Secretary of
                                                Investors-Indiana  from June
                                                1995 to December 1997. Senior  
                                                Vice  President, General Counsel
                                                Director and Assistant Secretary
                                                of Family Life Insurance
                                                Company since August 1996.

W. Lewis                  67             1988   Dentist practicing in San
Gilcrease                                       Marcos, Texas. Director of
                                                ILCO since 1988.  Director of 
                                                FIC from 1979 to July 6, 1991.


                                      -42-

<PAGE>




James M. Grace                55         1984   Vice President and Treasurer of 
                                                the Company since January, 1985.
                                                Executive Vice President, 
                                                Treasurer and Director of 
                                                Investors-IN, formerly known as
                                                InterContinental Life Insurance
                                                Company since 1989. Vice 
                                                President,Treasurer and Director
                                                of Financial Industries 
                                                Corporation since July, 1976.
                                                Executive Vice President and 
                                                Treasurer of Investors Life
                                                Insurance Company of North 
                                                America since 1989; Executive 
                                                Vice President, Treasurer and 
                                                Director of Family Life 
                                                Insurance Company (a subsidiary
                                                of Financial Industries 
                                                Corporation) since June 1991.
                                                Director, Executive Vice 
                                                President and Treasurer of
                                                Investors-Indiana from February
                                                1995 to December 1997.

Richard A.                    66         1981   Certified Public Accountant and 
Kosson                                          a partner in the firm of 
                                                Manheim, Kosson & Novick in 
                                                Millburn, New Jersey.  Director
                                                of ILCO since 1981.

Roy F. Mitte                  67         1984   Chairman of the Board and Chief
                                                Executive Officer of the Company
                                                and Investors-IN formerly known 
                                                as InterContinental Life 
                                                Insurance Company sinceJanuary,
                                                1985.  President of the Company 
                                                since April, 1985.  Chairman of 
                                                the Board, President and Chief
                                                Executive Officer of Financial 
                                                Industries Corporation since 
                                                1976.  Chairman of the Board, 
                                                President and Chief Executive 
                                                Officer of Investors Life 
                                                Insurance Company of North 
                                                America since December, 1988.
                                                Chairman of the Board, President
                                                and Chief Executive Officer of 
                                                Family Life Insurance Company
                                                since June 1991.  Chairman of 
                                                the Board, President and Chief
                                                Executive Officer of Investors-
                                                Indiana from February 1995 to 
                                                December 1997.  Chairman, ILG
                                                Securities Corporation since 
                                                December 1988.
   
Elizabeth T. Nash             49         1998   Member of the Board of Regents, 
                                                Texas State University System 
                                                since 1993, Chairman from 1997
                                                to 1998, Vice-Chairman from 1996
                                                to 1997.  Trustee of the 
                                                Development Foundation of 
                                                Southwest Texas State University
                                                since 1987, Chairman from 1992 
                                                to 1997, Vice-Chairman from 1989
                                                to 1992.  Director of ILCO since
                                                1998.
    


                                      -43-

<PAGE>




Eugene E. Payne               56         1989   Vice President of ILCO since 
                                                December 1988 and Director and 
                                                Secretary since May 1989.  Vice
                                                President and Director of 
                                                Financial Industries Corporation
                                                since February 1992.  Executive
                                                Vice President, Secretary and 
                                                Director of Investors Life
                                                Insurance Company of North 
                                                America since December 1988.  
                                                Executive Vice President since
                                                December 1988 and Director since
                                                May 1989 of Investors- IN, 
                                                formerly known as 
                                                InterContinental Life Insurance
                                                Company.  Executive Vice 
                                                President, Secretary and 
                                                Director of Family Life 
                                                Insurance Company since June 
                                                1991.  Director, Executive Vice
                                                President and Secretary of 
                                                Investors-Indiana from February
                                                1995 to December 1997.

H. Gene Pruner                70         1995   Director of ILCO since August 
                                                1996.  Director of Investors-IN
                                                since February, 1995.  President
                                                of Market Share, Inc. since 
                                                April 1985.

Steven P. Schmitt             52         1994   Senior Vice President since 
                                                April 1992 and Director, Vice 
                                                President and Assistant 
                                                Secretary since August 1989 of 
                                                Investors Life Insurance Company
                                                of North America and Investors-
                                                IN, formerly known as
                                                InterContinental Life Insurance
                                                Company.  Senior Vice President
                                                since April 1992 and Director 
                                                and Vice President since June 
                                                1991 of Family Life Insurance
                                                Company.  Director, Senior Vice
                                                President and Assistant 
                                                Secretary of Investors-Indiana
                                                from  June 995 to December 1997.



The  incumbent  directors  have been  nominated  for  submission  to vote of the
shareholders for reelection at the 1999 annual shareholders' meeting.



                                      -44-

<PAGE>



(b)  Executive Officers of the Registrant

The following table sets forth the names and ages of the persons who have served
as Registrant's  Executive  Officers during 1998 together with all positions and
offices held by them with the  Registrant.  Officers are elected to serve at the
will of the Board of Directors or until their  successors  have been elected and
qualified.

Name                       Age              Positions and Offices

Roy F. Mitte               67               Chairman of the Board, President
                                            and Chief Executive Officer

James M. Grace             55               Vice President and Treasurer

Eugene E. Payne            56               Vice President and Secretary

Jeffrey H. Demgen          46               Vice President

In May 1991,  Roy F. Mitte  suffered a stroke,  resulting  in partial  paralysis
affecting  his speech and  mobility.  Mr. Mitte  continues to make the requisite
decisions in his capacity as Chief  Executive  Officer,  although his ability to
communicate and his mobility are impaired.


(c)    Identification of certain significant employees

       Not Applicable.

(d)    Family relationships

       Not Applicable.

(e)    Business experience

      All of the  executive  officers of the Company are members of the Board of
Directors and their business experience has been outlined in Item 10(a).

(f)   Compliance with Section 16(a) of the Securities Exchange Act of  1934
     
Section  16(a) of the  Securities  Exchange Act of 1934  requires the  Company's
officers  and  directors,  and  persons  who own  more  than  ten  percent  of a
registered  class  of the  Company's  equity  securities,  to  file  reports  of
beneficial  ownership on Form 3 and changes in  beneficial  ownership on Forms 4
and 5 with the  Securities  and Exchange  Commission.  Officers,  directors  and
greater than ten-percent  shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a)

                                      -45-

<PAGE>



forms they file. Based solely on review of the copies of such forms furnished to
the  Company,  or written  representations  that no Forms 5 were  required,  the
Company  believes that for the period from January 1, 1998 through  December 31,
1998 all Section 16(a) filing requirements applicable to its officers, directors
and greater than ten-percent beneficial owners were complied with.


Item 11. Executive Compensation

Summary Compensation Table

The following table sets forth  information  concerning the  compensation of the
Company's Chief  Executive  Officer and each of the three other persons who were
serving as  executive  officers of the  Company at the end of 1998 and  received
cash compensation exceeding $100,000 during 1998.

<TABLE>

                              Annual Compensation 

<S>               <C>       <C>          <C>          <C>            <C>             <C>
                                                                  Long Term
                                                                   Compens-
Name and                                                          ation Awards     All Other
Principal                                                         Stock Options    Compensa-
Position         Year     Salary(1)     Bonus(7)    Other(2)       (Shares)         tion8

Roy F. Mitte,
Chairman,
President and    1998    $ 356,679    $1,535,000      -0-           -0-                -0-
Chief Executive  1997    $ 252,253       751,500      -0-           -0-                -0-
Officer          1996    $ 286,643           -0-      -0-           -0-        $2,446,397(3)

James M.
Grace, Vice      1998      195,000        25,000                                     2,365
President and    1997      195,000        40,000      -0-(4)        -0-             19,024
Treasurer        1996      195,000        15,000      -0-           -0-                -0-

Eugene E.
Payne, Vice      1998      195,000        20,000                                     2,365
President and    1997      195,000        40,000     -0-(5)         -0-             17,925
Secretary        1996      195,000        15,000      -0-           -0-                -0-

Jeffrey H.       1998    $ 145,384      $ 15,000      -0-           -0-                -0-
Demgen, Vice     1997    $ 117,884      $ 30,000      -0-           -0-                -0-
President6       1996    $ 102,500      $  7,500      -0-           -0-                -0-
</TABLE>


(1) The executive  officers of the Company have also been executive  officers of
the Company's  insurance  subsidiaries  and FIC and FIC's insurance  subsidiary,
Family Life.  FIC and/or Family Life  reimbursed the Company (or, in the case of
Mr.  Mitte,  authorized  payment  of) the  following  amounts as FIC's or Family
Life's share of these executive  officers' cash compensation and bonus for 1996,
1997 and 1998: (i) Mr. Mitte: $216,857,  $999,746, and $1,111,821  respectively,
which amounts are

                                      -46-

<PAGE>



not included in the above table;  (ii) Mr. Grace:  $83,987,  $68,150 and $64,152
respectively,  which  amounts are included in the above table;  (iii) Dr. Payne:
$83,987,  $68,150 and $61,447  respectively,  which  amounts are included in the
above table;  and (iv) Mr. Demgen  $46,125,  $66,548 and $72,173,  respectively,
which  amounts are  included in the above table.  Dr.  Payne  elected to defer a
portion ($13,000) of his 1998 compensation under the provisions of the Company's
Non-Qualified Deferred Compensation Plan. See also, Note 7.

(2) Does not  include  the  value of  perquisites  and other  personal  benefits
because the aggregate amount of any such compensation does not exceed the lesser
of $50,000 or 10 percent of the total amount of annual  salary and bonus for any
named individual.

(3) During 1996, the Company paid Mr. Mitte: (i) $1,862,000 for the cancellation
in 1996 of options to purchase  121,500  shares of the  Company's  common stock,
plus  interest  at the rate of 8% per year on such  amount for a one year period
(for  a  total  of  $2,011,737);  (ii)  $120,700  for  the  federal  income  tax
reimbursement relating to the cancellation in 1995 of options to purchase 50,000
shares of the Company's  common stock; and (iii) $313,960 for the federal income
tax reimbursement  relating to the 1996 options cancellation  described above in
this footnote.  Each of these  payments was made pursuant to a contract  entered
into between the Company and Mr. Mitte in 1993,  pertaining to  cancellation  of
options which had been granted to him in 1989.

(4) Mr. Grace  exercised  stock options in 1998 to purchase 12,000 shares of the
Company's  Common Stock under the  Non-Qualified  Option Plan.  See  "Aggregated
Option Exercises in 1998" below.

(5) Dr. Payne  exercised  stock options in 1997 to purchase  6,000 shares of the
Company's  Common  Stock  under  the  Non-Qualified  Stock  Option  Plan  .  See
"Aggregated Option Exercises in 1998" below.

(6) Mr. Demgen became an executive officer of the Company in August, 1996.

(7) The data in this column  represents the amount of annual bonus awarded.  The
bonuses for Mr.  Grace,  Dr.  Payne and Mr.  Demgen for the year 1997  represent
amounts paid in 1997, but include the bonuses  awarded with respect to the years
1996 and 1997.  Dr. Payne  elected to defer the amounts  shown for 1997 and 1998
into  the  Company's  Non-Qualified  Deferred  Compensation  Plan.  The Plan was
established  in 1997 to permit  Mr.  Grace and Dr.  Payne to defer a portion  of
their compensation. Under the provisions of the Plan, contributions are invested
on a money  purchase  basis  and plan  benefits  are  based on the  value of the
account at retirement or other  distribution.  In accordance with applicable tax
law  requirements,  amounts  allocated  to the Plan are subject to the claims of
general creditors of the Company. See also, Note 8.

(8) The data in this  column  represents  the amount paid by the Company in 1997
and 1998 to Mr.  Grace  and Dr.  Payne to  supplement  the  benefits  under  the
Company's Pension Plan. The supplement relates to each of the past service years
for  Mr.  Grace  and  Dr.  Payne  which  were  affected  by  the  limitation  on
compensation  which the Pension Plan may take into  account for benefit  accrual
purposes.  Under federal pension rules, an employee's benefits under a qualified
pension plan, such

                                      -47-

<PAGE>



as the ILCO Pension Plan, are limited to certain maximum amounts.  The amount of
the payments made in 1997 was  determined  by comparing the accrued  benefit for
the listed  individuals under the ILCO Pension Plan through December 31, 1996 to
the accrued benefit which the individual would have had under the Plan's benefit
formula  without  application  of the  limitations  applicable  to tax qualified
retirement  plans.  The value of the difference,  representing an amount payable
for life  commencing at normal  retirement age, was then commuted to its present
value,  which  amount is included in this  column.  In 1998,  the Company made a
similar  payment,  with respect to benefit  accruals for the year 1997 only. Mr.
Grace and Dr. Payne elected to defer their respective amounts into the Company's
Non-Qualified  Deferred Compensation Plan. The Company intends to make a similar
payment with respect to benefit accruals for subsequent years; however, there is
no obligation for it to do so. See also, Note 7.

Option Grants in 1998

No options were granted to any executive officers of the Company during the year
1998.

Aggregated Option Exercises in 1998

The following  table sets forth  information  concerning  each exercise of stock
options during 1998 by each of the  individuals  who were executive  officers of
the Company as of December 31, 1998.


                                Shares
                               Acquired               Value
Name                          On Exercise (#)       Realized ($)


James M. Grace                  12,000               $227,040

Eugene E. Payne                  6,000               $100,020


Aggregated Stock Option Values

The  following  table sets forth  information  with  respect to the  unexercised
options held by the executive officers of the Company.

<TABLE>


                           Number of Unexercised                         Value of Unexercised
                               Options Held at                         In-the-Money Options at
                             December 31, 1998                            December 31, 19981
                           Exercisable      Unexercisable              Exercisable      Unexercisable
<S>                             <C>             <C>                       <C>              <C>    <C>    <C>

James M. Grace                12,000            -0-                     $200,040        $  -0-

Eugene E. Payne                6,000            -0-                     $100,020        $  -0-
</TABLE>

                                     -48-

<PAGE>





(1)  Based on the  closing  price of the  Company's  Common  Stock on  NASDAQ on
December 31, 1998 ($20.00).

Members of Compensation Committee

W. Lewis  Gilcrease,  Richard A. Kosson and Elizabeth T. Nash are the members of
the Company's Compensation  Committee,  which makes recommendations to the Board
of Directors with respect to the Chief Executive Officer's compensation.

Compensation Committee Interlocks and Insider Participation

Roy F. Mitte  determines  the  compensation  of all  executive  officers  of the
Company,  other than the Chief Executive  Officer.  Mr. Mitte is the Chairman of
the Board, President and Chief Executive Officer of the Company and FIC. He also
determines  the  compensation  of all executive  officers of FIC, other than the
Chief Executive Officer.

Pension Plan Table

The following table sets forth estimated  annual pension  benefits  payable upon
retirement at age of 65 under the Company's noncontributory defined benefit plan
("Pension  Plan")  to an  employee  in  the  final  pay  and  years  of  service
classifications indicated, assuming a straight life annuity form of benefit. The
amounts  shown in the  table do not  reflect  the  reduction  related  to Social
Security benefits referred to below.

                                Years of Service 

                                                       30 or
Remuneration       15         20          25           more   
$125,000        $29,437    $ 39,250    $ 49,062     $ 58,875
 150,000         35,325      47,100      58,875       70,650
 160,000         37,680      50,240      62,800       75,360
 175,000         41,212      54,950      68,687       82,425
 200,000         47,100      62,800      78,500       94,200

The normal retirement  benefit provided under the Pension Plan is equal to 1.57%
of final  average  eligible  earnings  less  0.65% of the  participant's  Social
Security  covered  compensation  multiplied  by the number of years of  credited
service (up to 30 years).  The compensation  used in determining  benefits under
the  Pension  Plan  is  the  highest  average  earnings  received  in  any  five
consecutive full- calendar years during the last ten full-calendar  years before
the participant's retirement date. The maximum amount of annual salary and bonus
that can be used in determining  benefits under the Pension Plan is $200,000 for
any year prior to 1994 and is $150,000 for 1994,  1995, and 1996 and is $160,000
for 1997 and each subsequent year.

                                      -49-

<PAGE>



The annual eligible earnings, for 1998 only, covered by the Pension Plan (salary
up to  $160,000)  with  respect  to the  individuals  reported  in  the  Summary
Compensation  Table were as  follows,  with their  respective  years of credited
service under the Pension Plan at December 31, 1998 being shown in  parentheses:
Mr.  Mitte,  $160,000 (11 years),  Mr.  Grace,  $160,000 (11 years),  Dr. Payne,
$160,000 (10 years), and Mr. Demgen, $145,384 (6 years).

Compensation of Directors

Directors  who are not  officers or  employees  of the Company are paid a $5,000
annual fee, and are  compensated  $1,000 for each regular or special  meeting of
the Board of Directors  which they attend in person.  In the case of  telephonic
meetings of the Board, non-employee directors who participate in such telephonic
meetings are  compensated  $500 for such meeting.  Directors who participate via
telephone in a regular or special meeting which is held by other than conference
telephone are not entitled to a fee for such a meeting.

Non-employee directors serving on committees of the Board are compensated in the
amount of $500 for each committee meeting they attend whether such participation
is in person or by telephone,  provided that the committee  meeting is held on a
day other than that on which the Board meets.

Employment Agreements and Change In Control Arrangements

The terms and conditions of employment  agreements  that the Company would enter
into upon the occurrence of certain events that result in the agreements  taking
effect were approved by the Board of Directors with respect to Messrs. Grace and
Payne in 1991.  Each agreement  would include two  independent  provisions  with
respect to the effective date and the term of each agreement. First, the term of
the agreement  would begin on the earlier of (i) the date of retirement  (early,
normal or deferred) of Roy F. Mitte from his position as Chairman, President and
Chief  Executive  Officer of the Company or (ii) the date of death or disability
of Mr.  Mitte,  and would  terminate  on the last day of the twelfth  month next
following the  commencement  date of the term of the agreement,  unless extended
upon mutually acceptable terms.

Independently,  the term of the agreement  would commence upon the date that any
person  who is not  currently  a control  person  with  respect  to the  Company
acquires,  or enters  into an  agreement  to  acquire,  control of the  Company,
directly or indirectly,  and would end on the last day of the twelfth month next
following the date on which the employee  receives  notice of the termination of
his  employment  with the  Company  or the life  insurance  subsidiaries  of the
Company.

During the term of the agreement,  the employee would be entitled to perform all
of the duties of the position or positions held by the employee with the Company
and all  subsidiaries  of the  Company  on the date  immediately  preceding  the
commencement date of the agreement.

During the term of the  agreement,  the employee  would be entitled to an annual
rate of  compensation  which is not less than the annual rate of compensation in
effect  as of the  date  immediately  preceding  the  commencement  date  of the
agreement.  During the term of the agreement,  the employee would be entitled to
participate  in and benefit  from all  employee  benefit  plans and other fringe
benefits on

                                      -50-

<PAGE>



the same basis as such plans and benefits are made available to other  executive
personnel of the Company.

The  agreement  may be  terminated  by the  Company  only in the event  that the
employee is guilty of theft of property of the Company or commits a wrongful act
which has a material  adverse  effect upon the  business of the Company and with
respect to which the employee would not be entitled to indemnification under the
provisions of the Bylaws of the Company in effect as of the commencement date of
the agreement. The employee may terminate the agreement upon thirty days advance
written notice to the Company.


Item 12.  Security Ownership of Certain Beneficial Owners and Management

The following table presents  information as of March 15, 1999 as to all persons
who,  to the  knowledge  of the  Company,  were  beneficial  owners of five (5%)
percent or more of the Common Stock of the Company.


                                Amount and Nature
Name and Address              of Beneficial Ownership         Percent of Class

Financial Industries Corp.
701 Brazos, Suite 1400
Austin, TX 78701              1,966,346                           44.74 % (5)

Roy F. Mitte
701 Brazos, Suite 1400
Austin, TX 78701              1,993,245 (1, 2)                    45.36 % (5)

Investors Life Insurance
Company of North America
701 Brazos, Suite 1400
Austin, TX 78701                334,960  (3)                         7.62% (5)

Investors Life Insurance
Company of Indiana
701 Brazos, Suite 1400
Austin, TX 78701                281,560 (4)                           6.41 % (5)

Fidelity Management &
Research Company
82 Devonshire Street
Boston, MA 02109                433,900 (6)                           9.87% (5)



                                      -51-

<PAGE>



Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, WI 53202            264,800 (7)                           6.03 % (5)



1.   As of March  15,  1999,  Mr.  Mitte,  jointly  with his  wife  Joann,  owns
     1,493,216 common shares of Financial  Industries  Corporation  ("FIC"). The
     holdings  of Mr.  Mitte of FIC's  common  stock  constitutes  29.54% of the
     outstanding common stock of that company. In addition,  Mr. Mitte holds the
     position of Chairman,  President and Chief Executive  Officer of FIC. Since
     FIC holds a controlling  interest in ILCO, Mr. Mitte's personal holdings in
     the Company have been combined with the holdings of FIC in determining  the
     amount and percentage of Mr. Mitte's beneficial ownership of the Company.

2.   Includes 15,999 shares allocated to Mr. Mitte's account under the Employees
     Savings and Investment Plan and 10,900 shares owned directly by Mr. Mitte.

3.   Represents 281,560 shares owned by Investors-IN (formerly  InterContinental
     Life Insurance  Company and 53,400 shares owned  directly by  Investors-NA.
     Investors-IN is a life insurance company subsidiary of Investors-NA. All of
     these shares are treated as treasury shares.

4.   All are directly owned by Investors-IN and are treated as treasury shares.

5.   Assumes that outstanding  stock options available to other persons have not
     been exercised.

6.   As reported to the Company on a Schedule 13(G) and a Schedule 13(G)/A filed
     by FMR  Corporation,  the parent company of Fidelity  Management & Research
     Company  ("Fidelity").  According  to the  Schedule  13(G) and the Schedule
     13(G)/A,  Fidelity  acts as investment  advisor to the Fidelity  Low-Priced
     Stock Fund, a registered  investment company,  and the Fund is the owner of
     432,700 shares of ILCO common stock,  of which 418,300 shares were reported
     on a Schedule 13(G) filed on February 14, 1997,  14,400  additional  shares
     which were  reported on a Schedule  13(G)/A  filed on February 14, 1998 and
     1,200 additional  shares which were reported on a Schedule 13(G)/A filed on
     February 1, 1999.

7.   As reported to the Company on a schedule 13(G) filed by Heartland Advisors,
     Inc.  ("Heartland")  on January 21, 1999.  According to the Schedule 13(G),
     Heartland  acts as  investment  advisor with respect to certain  investment
     advisory accounts,  with respect to which various persons have the right to
     receive  or the power to direct  the  receipt  of  dividends  from,  or the
     proceeds from the sale of securities.  The Schedule 13(G)  identifies  that
     the  interests of one such account,  the Heartland  Value Fund, a series of
     Heartland Group,  Inc., a registered  investment  company,  relates to more
     than 5% of the common stock of ILCO.

The following  table contains  information as of March 15, 1999 as to the Common
Stock of the Company beneficially owned by each director,  nominee and executive
officer and by all executive

                                      -52-

<PAGE>



officers and directors of the Company as a group.  The information  contained in
the table has been  obtained by the Company  from each  director  and  executive
officer except for information known to the Company.  Except as indicated in the
notes to the  table,  each  beneficial  owner  has sole  voting  power  and sole
investment power as to the shares listed opposite his name.

                       Amount and Nature of               Percent of
Name                    Beneficial Ownership                Class   

Robert A. Bender        1,005  (3)                            *

Jeffrey H. Demgen       4,019 (3)                             *

Theodore A. Fleron     15,730 (3,4)                           *

W. Lewis Gilcrease         -0-

James M. Grace 1       62,456 (2,3)                         1.42 %

Richard A. Kosson         200                                  *

Roy F. Mitte        1,993,245 (3)                           45.36 %

Elizabeth T. Nash         100                                  *

Eugene E. Payne 1      11,146 (3)                              *

H. Gene Pruner             -0-

Steven P. Schmitt       13,573 (3,4)                           *

All Executive
Officers and
Directors as a
group, all of
whom are listed
above                 2,101,474 (1,2,3,4)                   47.82%
* Less than 1%

(1)  As an executive  officer and/or  director of FIC which as of March 15, 1999
     beneficially  owned  1,966,346  shares of the  Company's  Common Stock . In
     addition to the shareholdings of Mr. Mitte in FIC (see Note 1, above),  Mr.
     Grace owns 5,600 shares of FIC Common Stock.


                                      -53-

<PAGE>



(2)  Includes  12,000 shares issuable upon exercise of options granted under the
     Non-Qualified  Stock  Option Plan  during  1988 to Mr.  Grace at a price of
     $3.33 (as adjusted) per share, which are currently available for exercise.

(3)  Includes  shares  beneficially   acquired  through   participation  in  the
     Company's  ESOP,  401K and/or the Employee Stock  Purchase Plan,  which are
     group plans for eligible employees.

(4)  Includes 6,000 shares  issuable upon exercise of options  granted under the
     Non-Qualified  Stock Option Plan during 1988 to each of Messrs.  Fleron and
     Schmitt at a price of $3.33 (as  adjusted)  per share,  which are currently
     exercisable.


Item 13.  Certain Relationships and Related Transactions with Management

a.   Prior to the repayment of the ILCO Senior Loan on September  30, 1998,  the
     obligations  of ILCO  under the Senior  Loan were  guaranteed  by FIC.  FIC
     presently owns 1,966,346 shares of the company's Common Stock, constituting
     44.74% of such shares outstanding.

b.   As part of the financing  arrangement  for the  acquisition  of Family Life
     Insurance  Company,  Family Life Corporation  ("FLC"), a subsidiary of FIC,
     entered into a Senior Loan  agreement  under which $50 million was provided
     by a group of  banks.  The  balance  of the  financing  consisted  of a $30
     million  subordinated  note issued by FLC to Merrill Lynch Insurance Group,
     Ins.  ("Merrill  Lynch") and $14 million borrowed by another  subsidiary of
     FIC  from  an  affiliate  of  Merrill  Lynch  and  evidenced  by  a  senior
     subordinated  note in the  principal  amount  of $12  million  and a junior
     subordinated  note in the  principal  amount of $2 million  and $25 million
     lent by two insurance  company  subsidiaries of ILCO. The latter amount was
     represented  by a $22.5  million loan from  Investors-NA  to FLC and a $2.5
     million loan provided  directly to FIC by Investors-CA.  In addition to the
     interest  provided under those loans,  Investors-NA and  Investors-CA  were
     granted  by FIC  non-transferable  options  to  purchase,  in  the  amounts
     proportionate  to their  respective  loans, up to a total of 9.9 percent of
     shares of FIC's  common  stock at a price of $10.50  per share  ($2.10  per
     share as adjusted  for the  five-for-one  stock split in  November,  1996),
     equivalent  to the then current  market  price,  subject to  adjustment  to
     prevent dilution. The original provisions of the options provided for their
     expiration on June 12, 1998 if not previously exercised. In connection with
     the 1996  amendments to the  subordinated  notes, as described  below,  the
     expiration date of the options were extended to September 12, 2006.

     On July 30, 1993, the subordinated  indebtedness  owed to Merrill Lynch and
     its  affiliate  was  prepaid.  The Company  paid $38 million  plus  accrued
     interest  to retire  the  indebtedness,  which had a  principal  balance of
     approximately $50 million on July 30, 1993. The primary source of the funds
     used to prepay the subordinated  debt was new  subordinated  loans totaling
     $34.5  million  that  FLC  and  another  subsidiary  of FIC  obtained  from
     Investors-NA.  The principal amount of the new subordinated debt is payable
     in four equal annual  installments  in 2000,  2001, 2002 and 2003 and bears
     interest at an annual rate of 9%. The other terms of

                                      -54-

<PAGE>



     the new debt are substantially the  same  as  those  of the  $22.5  million
     subordinated  loans that  Investors-NA  had previously made to FLC and that
     continue to be outstanding.

     In June, 1996, the provisions of the notes from Investors-NA to FIC, Family
     Life  Corporation  ("FLC") and Family  Life  Insurance  Investment  Company
     ("FLIIC") were modified as follows:  (a) the $22.5 million note was amended
     to  provide  for  twenty  quarterly  principal  payments,  in the amount of
     $1,125,000  each,  to commence on December  12, 1996;  the final  quarterly
     principal  payment is due on September  12, 2001;  the interest rate on the
     note  remains at 11%,  (b) the $30 million  note was amended to provide for
     forty quarterly principal payments,  in the amount of $163,540 each for the
     period  December  12,  1996 to  September  12,  2001;  beginning  with  the
     principal  payment due on December  12, 2001,  the amount of the  principal
     payment increases to $1,336,458;  the final quarterly  principal payment is
     due on September 12, 2006; the interest rate on the note remains at 9%, (c)
     the $4.5 million note was amended to provide for forty quarterly  principal
     payments, in the amount of $24,531 each for the period December 12, 1996 to
     September 12, 2001;  beginning  with the principal  payment due on December
     12, 2001, the amount of the principal  payment  increases to $200,469;  the
     final  quarterly  principal  payment  is due on  September  12,  2006;  the
     interest  rate on the note  remains  at 9%, (d) the $2.5  million  note was
     amended to provide that the  principal  balance of the note is to be repaid
     in twenty quarterly  installments of $125,000 each, commencing December 12,
     1996 with the final payment due on September 12, 2001; the rate of interest
     remains at 12%,  (e) the Master PIK note,  which was issued to provide  for
     the  payment in kind of  interest  due under the terms of the $2.5  million
     note prior to June 12,  1996,  was  amended to provide  that the  principal
     balance  of  the  note  ($1,977,119)  is to be  paid  in  twenty  quarterly
     principal payments,  in the amount of $98,855.95 each, to commence December
     12, 1996 with the final  payment due on September  12,  2001;  the interest
     rate on the note remains at 12%.

     In December, 1998, FLIIC was dissolved. In connection with the dissolution,
     all of the assets  and  liabilities  of FLIIC  became  the  obligations  of
     FLIIC's sole  shareholder  (FIC).  Accordingly,  the obligations  under the
     provisions of the $4.5 million note described above are now the obligations
     of FIC. 

c.   The data processing  needs of ILCO's and FIC's insurance  subsidiaries  are
     provided by FIC Computer Services,  Inc. ("FIC Computer"),  a subsidiary of
     FIC. Under the provisions of the data  processing  agreement,  FIC Computer
     provides data processing services to each subsidiary for fees equal to such
     subsidiary's   proportionate  share  of  FIC  Computer's  actual  costs  of
     providing  those  services  to  all  of  the  subsidiaries.  The  Company's
     insurance  subsidiaries  paid  $2.82  million  and  Family  Life paid $1.61
     million to FIC Computer for data  processing  services  provided during the
     year ended December 31, 1998.

d.   In 1995, Investors-NA entered into a reinsurance agreement with Family Life
     pertaining  to  universal  life  insurance  written  by  Family  Life.  The
     reinsurance agreement is on a co-insurance basis and applies to all covered
     business with  effective  dates on and after January 1, 1995. The agreement
     applies to only that portion of the face amount of the policy which

                                      -55-

<PAGE>



     is less than  $200,000;  face amounts of $200,000 or more are  reinsured by
     Family Life with a third party reinsurer.

e.   In 1996,  Investors-NA  entered into a  reinsurance  agreement  with Family
     Life, pertaining to annuity contracts written by Family Life. The agreement
     applies to contracts written on or after January 1, 1996.

f.   Roy F. Mitte serves as Chairman,  President and Chief Executive  Officer of
     both FIC and ILCO.  James M. Grace serves as Vice President,  Treasurer and
     Director of both  companies  and Secretary of FIC. Dr. Payne serves as Vice
     President,  Secretary and Director of both  companies.  Messrs.  Demgen and
     Fleron serve as Vice  Presidents and Directors of both  companies.  Mr. Roy
     Mitte holds beneficial ownership of 29.54% of the outstanding shares of FIC
     (see "Security Ownership of Certain Beneficial Owners and Management").

g.   Mr.  Joseph F.  Crowe  retired  from  active  service  with the  Company in
     January,  1997 and  served  on the  ILCO  Board  until  October,  1997;  he
     continues to serve on the Board of Directors of FIC.  Following Mr. Crowe's
     retirement, the Company entered into a consulting agreement with him. Under
     the terms of the  agreement,  Mr.  Crowe is to be  available  for  periodic
     consultation  on actuarial  matters  related to the  operations of the life
     insurance  companies.  The agreement  provides for a payment of $25,000 per
     year for a period of five- years.

h.   In November,  1998, FIC and Family Life Insurance Company purchased 373,304
     shares of FIC's common stock from the Roy F. and Joann C. Mitte Foundation,
     a Texas non-profit  corporation (the  "Foundation").  These shares had been
     previously   donated  to  the  Foundation  by  Mr.  and  Mrs.  Mitte.   The
     transaction,  which was  privately  negotiated  between  FIC,  Family  Life
     Insurance Company and the Foundation,  involved  approximately  6.8% of the
     outstanding  shares of FIC.  The  purchase  price  was at the then  current
     market  price of FIC's  common  stock  ($18.625  per  share).  Family  Life
     Insurance Company acquired 272,000 shares for its investment  portfolio and
     FIC acquired 101,304 shares.





                                      -56-

<PAGE>




                                     Part IV

Item 14.  Exhibits, Financial Statements, Schedules, and
                  Reports on Form 8-K

(a) The following documents have been filed as part of this Report.

1.       Financial Statements as identified in Item 8 above.

2. Financial Statement Schedules Required to be filed by Item 8.

         a.       Schedule I-Summary of Investments other than Investments in
                  Related Parties.

         b.       Schedule II -Condensed Financial Statements of Registrant.
         c.       Schedule IV-Reinsurance. 

3.       Exhibits filed with this report or incorporated herein by reference are
         as listed in the Index to Exhibits on page EX-1.

         (b)      Reports on Form 8-K:

                  No reports on Form 8-K were filed  during the last  quarter of
                  the fiscal year ended December 31, 1998.


                                      -57-

<PAGE>




               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                        FORM 10-K--ITEM 14 (a)(1) and (2)
                          LIST OF FINANCIAL STATEMENTS
                                TABLE OF CONTENTS



(1)      The following  consolidated  financial  statements of  InterContinental
         Life Corporation and Subsidiaries are included in Item 8:

         Report of Independent Accountants .................................F-2

         Consolidated Balance Sheets,
         December 31, 1998 and 1997........ ................................F-3

         Consolidated Statements of Income, for the
         years ended December 31, 1998, 1997 and 1996.......................F-5

         Consolidated Statements of Changes in Shareholders' Equity,
         for the years ended December 31, 1998, 1997 and 1996...............F-6

         Consolidated Statements of Cash Flows, for the years
         ended December 31, 1998, 1997 and 1996.............................F-9

         Notes to Consolidated Financial Statements...................,.....F-12

(2)      The   following   consolidated   financial   statement   schedules   of
         InterContinental Life Corporation and Subsidiaries are included:

         Schedule I - Summary of Investments Other
         Than Investments in Related Parties................................F-44

         Schedule II - Condensed Financial Statements of
         Registrant.........................................................F-45

         Schedule IV - Reinsurance..........................................F-49



All other  schedules for which  provision is made in the  applicable  accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions, or are not applicable, and therefore have been omitted.


                                      F-1

<PAGE>






                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders of
 InterContinental Life Corporation



In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing  under  Item  14(a)(1)  and (2) on page  F-1  present  fairly,  in all
material respects,  the financial position of InterContinental  Life Corporation
and its  subsidiaries  (the  "Company")  at December 31, 1998 and 1997,  and the
results of their  operations and their cash flows for each of the three years in
the period ended  December 31,  1998,  in  conformity  with  generally  accepted
accounting principles.  These financial statements are the responsibility of the
Company's  management;  our  responsibility  is to  express  an opinion on these
financial  statements  based on our  audits.  We  conducted  our audits of these
statements  in accordance  with  generally  accepted  auditing  standards  which
require that we plan and perform the audit to obtain reasonable  assurance about
whether the financial  statements  are free of material  misstatement.  An audit
includes  examining,  on a test  basis,  evidence  supporting  the  amounts  and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for the opinion expressed above.




PricewaterhouseCoopers LLP
Dallas,  Texas
March 26, 1999
                                      F-2
<PAGE>

               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                            (in thousands of dollars)
<TABLE>
                                                         December 31,
<S>                                                 <C>                  <C> 
                                                    1998                 1997
ASSETS
Investments:
Fixed maturities, at
             amortized cost (market value
        approximates $3,059 and $3,332)       $    3,005            $    3,412
Fixed maturities available for sale,
         at market value (amortized cost
         $435,130 and $436,836)                  450,149               454,462
Equity securities, at market value
         (cost approximates $338 and $369)         3,121                 4,902
Policy loans                                      53,614                53,499
Mortgage loans                                    10,332                10,862
Invested real estate and other invested
         assets                                   10,025                 1,300
Short-term investments                           171,840               164,622
                                          
         Total investments                       702,086               693,059
Cash and cash equivalents                         12,206                 9,041
Notes receivable from affiliates                  47,645                53,792
Accrued investment income                          7,768                 7,781
Agent advances and other receivables              20,753                11,362
Reinsurance receivables                           18,847                20,433
Property and equipment, net                        3,470                 1,902
Deferred policy acquisition costs                 31,953                28,621
Present value of future profits of
         acquired businesses                      43,666                47,286
Deferred financing costs                               0                   111
Other assets                                      10,643                 7,929
Separate account assets                          451,211               440,336
                                          
         Total Assets                       $  1,350,248          $  1,321,653
</TABLE>
                                                                                

         The accompanying notes are an integral part of the consolidated
                              financial statements.

                                      F-3
<PAGE>




               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS, Continued
                            (in thousands of dollars)
<TABLE>
                                                                  
<S>                                                <C>                    <C>
                                                         December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY              1998                  1997 
                                                    
Policy liabilities and contractholder     
 deposit funds:
Future policy benefits                       $   135,463           $   131,720
Contractholder deposit funds                     545,908               525,135
Unearned premiums                                  2,124                 2,507
Other policy claims and benefits payable          10,856                12,272
                                          
                                                 694,351               671,634
Other policyholders' funds                         3,056                 3,093
Senior loan                                        - 0 -                10,964
Deferred federal income taxes                     30,185                31,811
Other liabilities                                 20,127                20,299
Separate account liabilities                     448,294               438,090
                                          
         Total Liabilities                     1,196,013             1,175,891
Commitments and Contingencies(Note 13)
Redeemable preferred stock:
Class A Preferred, $1 par value,
 5,000,000 shares authorized, issued               5,000                 5,000
Class B Preferred, $1 par value,
 15,000,000 shares authorized, issued             15,000                15,000
                                          
                                                  20,000                20,000
Redeemable preferred stock held
 in treasury                                     (20,000)              (20,000)
                                                     -0-                   -0-
Shareholders' Equity:
Common Stock, $.22 par value, 
 15,000,000 shares authorized; 
 5,385,739 and 5,343,739 shares issued,
 and 4,376,706 and 4,331,335 shares
 outstanding in 1998 and 1997,
 respectively                                      1,185                 1,176
Additional paid-in capital                         4,385                 4,253
Accumulated other comprehensive income            11,571                14,403
Retained earnings                                140,356               129,237
                                          
                                                 157,497               149,069
Common treasury stock, at cost,
 1,009,033 and 1,012,404 in 1998
 and 1997,  respectively                          (3,262)               (3,307)
                                          
Total Shareholders' Equity                       154,235               145,762
                                          
Total Liabilities and Shareholders'
 Equity                                     $  1,350,248          $  1,321,653
                                                                                 
</TABLE>

                   The accompanying notes are an integral part
                          of the consolidated financial
                                   statements.
                                      F-4

<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
              (in thousands of dollars, except for per share data)
<TABLE>

                                                   Year Ended December 31,

<S>                                              <C>                 <C>               <C>   
                                                 1998                1997              1996  
Revenues:                                                

 Premium                                     $   10,890           $  11,031           $  9,980
 Net investment income                           54,619              57,740             59,836
 Earned insurance charges                        41,067              40,853             42,238
 Gain on sale of real estate                        -0-              14,630             23,520
 Other                                            2,886               3,429              2,670
                                          
                                                109,462             127,683            138,244
                                          
Benefits and expenses:
 Policyholder benefits and expenses              38,367              37,962             40,091
 Interest expense on contract holders
         deposit funds                           29,966              30,533             32,068
 Amortization of present value of future
         profits of acquired businesses           5,903               6,311              3,366
 Amortization of deferred policy
         acquisition costs                        2,128               2,818              2,574
 Operating expenses                              14,853              16,798             15,884
 Interest expense                                   659               1,659              2,820
                                          
                                                 91,876              96,081             96,801
                                          
Income from operations                           17,586              31,602             41,443
Provision for federal income taxes:
   Current                                        6,899               9,005             10,227
   Deferred                                       (432)               2,057              4,278
                                          
                                                  6,467              11,062             14,505
                                          
Net income                                   $   11,119            $ 20,540          $  26,938
                                             
Basic:
Weighted average common stock
 outstanding                                      4,375               4,328              4,233
Basic earnings per share                           2.54            $   4.75          $    6.36
                                          
Diluted:
Common stock and common stock
         equivalents                              4,462               4,369              4,441
Diluted earnings per share                     $   2.49            $   4.70          $    6.07
</TABLE>
                                                         
  The accompanying notes are an integral part of these consolidated financial
                                  statements.
                                      F-5

<PAGE>




               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                                 (in thousands)
<TABLE>

                                                                      Additional
                                                Common Stock           Paid-in
                                              Shares      Amount       Capital
<S>                                           <C>          <C>            <C>  
Balance at December 31, 1995                 5,166      $ 1,137        $ 3,521
 Comprehensive Income:
   Net income Other comprehensive income:
   Change in net unrealized appreciation 
   of equity securities
   Change in net unrealized gain on
   investments in fixed maturities 
   available for sale                                                      
                                           
 Total comprehensive income                                                              
                                           
 Options exercised                              58           13             231
                                           
Balance at December 31, 1996                 5,224        1,150           3,752
 Comprehensive income:
   Net income Other comprehensive income:
   Change in net unrealized appreciation
   of equity securities
   Change in net unrealized gain on 
   investments in fixed maturities 
   available for sale                                       
                                           
 Total comprehensive income                                                              
                                           
 Treasury stock purchased
 Options exercised                             120           26             501
                                           
Balance at December 31, 1997                 5,344        1,176           4,253
 Comprehensive income:
   Net income Other comprehensive income:
   Change in net unrealized appreciation 
   of equity securities
   Change in net unrealized gain on
   investments in fixed maturities
   available for sale                                                      
 Total comprehensive income                                                              
 Treasury stock reissued                   
 Options exercised                              42            9             132
                                                    
                                                
Balance at December 31, 1998                 5,386      $ 1,185         $ 4,385
                                           
</TABLE>

                   The accompanying notes are an integral part
                         of these consolidated financial
                                   statements.

                                      F-6
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                            (in thousands of dollars)
<TABLE>

                                          Accumulated Other Comprehensive Income

                                                       Net Unrealized
                                                       Gain on
                                         Net           Investments   Total
                                         Unrealized    In Fixed      Accumulated
                                         Appreciation  Maturities    Other
                                         of Equity     Available   Comprehensive
                                         Securities    For Sale      Income
<S>                                            <C>           <C>          <C> 

Balance at December 31, 1995                $   748      $ 12,938      $ 13,686
 Comprehensive income:                                                                              
   Net income Other comprehensive income:
   Change in net unrealized appreciation
    of equity securities                        507                         507
   Change in net unrealized gain on
    investments in fixed maturities
    available for sale                                    (11,413)      (11,413)
                                         
 Total comprehensive income                     507       (11,413)      (10,906)
                                         
 Options exercised
Balance at December 31, 1996                  1,255         1,525         2,780
 Comprehensive income:                                                
   Net income Other comprehensive income:
   Change in net unrealized appreciation
    of equity securities                      1,691                       1,691
   Change in net unrealized gain on
    investments in fixed maturities 
    available for sale                                      9,932         9,932
                                                    
 Total comprehensive income                   1,691         9,932        11,623
                                         
 Treasury stock purchased                    
 Options exercised                                                                   


Balance at December 31, 1997                 2,946         11,457        14,403
Comprehensive income:                                                 
  Net income Other comprehensive income:
 Change in net unrealized appreciation of
  equity securities                         (1,137)                      (1,137)
 Change in net unrealized gain on 
  investments in fixed maturities
  available for sale                                       (1,695)       (1,695)
                                         
 Total comprehensive income                 (1,137)        (1,695)       (2,832)
                                         
 Treasury stock reissued
 Options exercised                                                   
                                         
Balance at December 31, 1998              $  1,809       $  9,762      $ 11,571
                                          
</TABLE>

                   The accompanying notes are an integral part
                         of these consolidated financial
                                   statements.

                                      F-7
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                            (in thousands of dollars)


<TABLE>
                                                               Common           Total
                                           Retained            Treasury       Shareholders'
                                           Earnings              Stock           Equity
<S>                                          <C>                  <C>                <C>    

Balance at December 31, 1995               $ 81,759           $ (3,018)           $ 97,085
 Comprehensive income:
  Net income                                 26,938                                 26,938
 Other comprehensive income:
  Change in net unrealized appreciation
   of equity securities                                                                507
  Change in net unrealized loss on
   investments in fixed maturities
   available for sale                                                              (11,413)
                                          
 Total comprehensive income                  26,938                                 16,032
                                                       
 Options exercised                                                                     244
                                          

Balance at December 31, 1996                108,697             (3,018)            113,361
 Comprehensive income:
   Net income                                20,540                                 20,540
 Other comprehensive income:
   Change in net unrealized appreciation
    of equity securities                                                             1,691
   Change in net unrealized loss on
    investments in fixed maturities
    available for sale                                                               9,932     
                                          
 Total comprehensive income                  20,540                                 32,163
                                                        
Treasury stock purchased                                          (289)               (289)
                                          
 Options exercised                                                                     527
                                                        
                                                                                      
Balance at December 31, 1997                129,237             (3,307)            145,762
 Comprehensive income:
   Net income                                11,119                                 11,119
 Other comprehensive income:
   Change in net unrealized appreciation
    of equity securities                                                            (1,137)
   Change in net unrealized loss on
    investments in fixed maturities 
    available for sale                                                              (1,695)
                                          
 Total comprehensive income                  11,119                                  8,287
                                                        
 Treasury stock reissued                                            45                  45
                                          
 Options exercised                                                                     141
                                                       

Balance at December 31, 1998              $ 140,356           $ (3,262)          $ 154,235
                                            

</TABLE>

                   The accompanying notes are an integral part
                         of these consolidated financial
                                   statements.

                                      F-8
<PAGE>




               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)
<TABLE>

                                                        Year Ended December 31,
<S>                                                <C>               <C>               <C>    

CASH FLOWS FROM OPERATING                         1998              1997              1996  
                                   
ACTIVITIES
Net Income                                    $ 11,119            $ 20,540           $ 26,938
Adjustments to reconcile net income to
       net cash (used in) provided by
operating activities:
Amortization of present value of future
          profits of acquired businesses         5,903               6,311              3,366
Amortization of deferred policy
         acquisition costs                       2,128               2,819              2,572
Depreciation                                       551               2,398              1,356
Net gain on sales of investments                  (988)            (14,805)           (23,394)
Financing costs amortized                          111                 525                961
Amortization of deferred gain on sale of
         real estate                              (110)               (110)              (110)
Changes in assets and liabilities:
Decrease in accrued investment income              698                 362                383
(Increase) decrease in agent advances and
         other  receivables                     (7,686)               4,170             (2,783)
Policy acquisition costs deferred               (5,460)              (4,502)            (4,584)
Decrease in policy liabilities and
contractholder deposit funds                   (16,194)             (17,585)           (16,374)
(Decrease) increase in other policyholders'
funds                                             (668)                (258)                20
(Decrease) increase in other liabilities        (1,036)               5,172            (13,270)
(Decrease) increase in deferred federal
 income taxes                                   (2,355)               5,302             (1,770)
(Increase) decrease in other assets             (2,691)               1,036             (2,106)
Other, net                                        (653)              (7,416)             5,331
                                             
Net cash (used in) provided by operating
 activities                                    (17,331)               3,959            (23,464)
</TABLE>
                                                        
                   The accompanying notes are an integral part
                         of these consolidated financial
                                   statements.

                                      F-9
<PAGE>




               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)

<TABLE>
                                                    Year Ended December 31,
<S>                                               <C>                <C>                <C>
CASH FLOWS FROM INVESTING                         1998               1997               1996  
                                          
ACTIVITIES
Purchase of insurance subsidiary                (1,322)            (11,688)               -0-
Investments purchased                          (41,915)            (24,276)           (55,395)
Proceeds from sales and maturities of
investments                                     77,700             117,025            112,791
Net change in short-term investments            (7,218)            (71,415)            (5,562)
Purchases & retirements of equipment            (2,119)               (283)             1,319
Decrease in notes receivable
from affiliates                                  6,148               6,148              1,284
                                           
Net cash provided by investing
activities                                      31,274              15,511             54,437
                                           

CASH FLOWS FROM FINANCING    ACTIVITIES
Issuance (purchase) of treasury stock               45                (289)               -0-
Issuance of common stock                           141                 527                244
Repayment of debt                              (10,964)            (13,980)           (34,441)
                                           
Net cash used in financing activities          (10,778)            (13,742)           (34,197)
                                           
Net increase (decrease) in cash and cash
equivalents                                      3,165               5,728             (3,224)
Cash and cash equivalents, beginning of 
    year
                                                 9,041               3,313              6,537
                                           
Cash and cash equivalents, end of year       $  12,206            $  9,041           $  3,313
</TABLE>
                                                                  


                   The accompanying notes are an integral part
                         of these consolidated financial
                                   statements.

                                      F-10
<PAGE>




         INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES CONSOLIDATED
                            STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)

Supplemental Cash Flow Disclosures:
                                              Year Ended December 31,          
                                1998                 1997              1996     
Income taxes paid            $  12,362           $   2,200          $  13,567
Interest paid                $     871           $   1,925          $   3,377

Supplemental Schedule of Non-Cash Investing Activities:

The Company purchased the outstanding  capital stock of two life insurers in the
second quarter of 1998 and the third quarter of 1997 for cash purchase prices of
$16.6 million  (including a $12.4 million  dividend paid by the acquired company
to its former  parent)  and $11.8  million,  respectively,  net of post  closing
adjustments.  The  consolidated  statements  of cash flows reflect the impact of
these  acquisitions.  These purchases resulted in the Company receiving tangible
assets and assuming liabilities as follows:


                                                  1998                  1997  
                                                
                  Assets                      $  57,745             $   32,420
                  Liabilities                 $  41,135             $   20,653



                   The accompanying notes are an integral part
                         of these consolidated financial
                                   statements.

                                      F-11
<PAGE>




           INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES TO
                        CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

InterContinental  Life  Corporation  (ILCO  or  the  "Company")  is  principally
engaged,  through its  subsidiaries,  in  administering  existing  portfolios of
individual  life  insurance  and  annuity  products.   The  Company's  insurance
subsidiaries  are also  engaged in the business of  marketing  and  underwriting
individual life insurance and annuity  products in 49 states and the District of
Columbia. Such products are marketed through independent,  non-exclusive general
agents.

Principles of Consolidation

The consolidated  financial  statements include the accounts of InterContinental
Life Corporation and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Basis of Presentation

The  financial  statements  have been  prepared  in  conformity  with  generally
accepted accounting principles which differ from statutory accounting principles
required by regulatory  authorities  for the Company's  insurance  subsidiaries.
Significant accounting policies followed by the Company are:

Use of Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results will differ from those estimates.

Investments

The Company's general investment philosophy is to hold fixed maturity securities
until  maturity.  However,  fixed  maturities  may be sold prior to the maturity
dates in response  to  changing  market  conditions,  duration  of  liabilities,
liquidity  factors,  interest  rate  movements  and  other  investment  factors.
Accordingly,  most fixed  maturity  investments  are classified as available for
sale and are carried at market value.  All other fixed maturities are carried at
the  lower of  amortized  cost or net  realizable  value as  management  has the
positive  intent and the  Company has the  ability to hold such  investments  to
maturity.  Unrealized gains and losses on securities  available for sale are not
recognized  in earnings  but are  reported as a separate  component of equity in
accumulated other comprehensive income, net of income tax effect.

                                      F-12
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Premiums  and  discounts  on  collateralized  mortgage  obligations  (CMOs)  are
amortized  over  the  estimated  redemption  period  as  opposed  to the  stated
maturities.

Equity  securities are carried at market value.  Unrealized  gains and losses on
equity  securities,  net of deferred income taxes, if applicable,  are reflected
directly in shareholders'  equity.  Mortgage loans and policy loans are recorded
at  unpaid  balances.   Short-term   investments  are  carried  at  cost,  which
approximates  market value, and generally  consist of those fixed maturities and
other  investments that are intended to be held less than one year from the date
of purchase.

Real estate is carried at cost less accumulated depreciation, which is generally
calculated  using the  straight-line  method  over 20 to 40  years.  Accumulated
depreciation  on  investments  in real estate is  $5,501,545  and  $5,243,720 at
December  31,  1998 and 1997,  respectively.  Interest is  capitalized  on funds
expended  for  construction  of  facilities  for the  Company's  own use and for
facilities intended for sale or lease. Interest cost capitalized and included as
a component  of the  historical  cost of the assets was  approximately  $-0- and
$237,000 in 1998 and 1997, respectively.

Realized gains and losses on disposal of investments are included in net income.
The cost of investments sold is determined on the specific identification basis,
except  for  equity  securities,  for which the  first-in,  first-out  method is
employed.  When an impairment of the value of an investment is considered  other
than  temporary,  the  decrease in value is reported in net income as a realized
investment loss and a new cost basis is established.

Cash and Cash Equivalents

Short-term  investments  with  maturities of three months or less at the time of
purchase are reported as cash equivalents.

Sale of Real Estate

Net income for 1997 includes $14.0 million (before federal income tax) resulting
from the sale during the fourth quarter of 1997 of the Bridgepoint Square office
complex.  The  aggregate  selling  price was $78  million  which  was  allocated
approximately 78.5% to Investors-NA and 21.5% to Family Life. The sale closed on
December 5, 1997.

Net income for 1996 includes $23.5 million (before federal income tax) resulting
from  the  sale  during  the  first  quarter  of 1996 of the  Austin  Centre,  a
hotel/office  complex,  located in Austin,  Texas, which served as the Company's
home office building. The selling price was $62.67 million, less $1 million paid
to a capital  reserve  account for the purchaser.  The property was purchased in
1991 for $31.275 million. The book value of the property,  $36.8 million, net of
improvements and amortization,  was retained and reinvested by the Company.  The
balance of the  proceeds of the sale,  net of federal  income  tax,  was used to
reduce the Company's senior loan obligations by $15 million.  The sale closed on
March 29, 1996.

                                      F-13
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment

Property  and  equipment  is  stated  at  cost  less  accumulated  depreciation.
Depreciation is calculated  using  straight-line  and  accelerated  methods over
estimated  useful lives of 10 to 33 years for buildings and  improvements and 10
years for  furniture  and  equipment.  Maintenance  and  repairs  are charged to
expense when incurred.  Accumulated  depreciation for property and equipment and
home office real estate was  $5,091,033  and $4,517,477 at December 31, 1998 and
1997, respectively.

Deferred Acquisition Costs

The  cost  of  acquiring  new  and  renewal  business,  principally  first  year
commissions  and  certain  expenses  of the  policy  issuance  and  underwriting
departments,  which vary with and are primarily related to the production of new
and renewal business, have been deferred to the extent recoverable.  Acquisition
costs  related  to  universal  life  products  are  deferred  and  amortized  in
proportion  to the ratio of estimated  annual gross  profits to total  estimated
gross  profits  over the  expected  lives of the  contracts.  Acquisition  costs
related to traditional  life insurance  business are deferred and amortized over
the premium paying period of the related policies.

Present Value of Future Profits

The present  value of future  profits of acquired  traditional  life business is
amortized over the premium  paying period of the related  policies in proportion
to the ratio of the annual premium revenue to total anticipated  premium revenue
applicable to such policies.  Interest on the unamortized balance is accreted at
rates from 7.0% to 8.5%.

For  interest-sensitive  products,  these costs are amortized in relation to the
present  value,  using the current  credited  interest  rate, of expected  gross
profits of the policies over the anticipated coverage period.

Retrospective  adjustments  of  these  amounts  are made  periodically  upon the
revision of estimates of current or future gross profits on universal  life-type
products  to be realized  from a group of  policies.  Recoverability  of present
value of future  profits is  evaluated  periodically  by  comparing  the current
estimate of future profits to the unamortized asset balances.

Anticipated  investment  returns,  including realized gains and losses, from the
investment  of   policyholder   balances  are  considered  in  determining   the
amortization of present value of future profits acquired.

                                      F-14
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred Financing Costs

Financing costs associated with the Company's Senior Loan were deferred and were
amortized over the borrowing periods using the interest method.

Separate Accounts

Separate  account assets,  carried at market value,  and  liabilities  represent
policyholder funds maintained in accounts having specific investment objectives.
The net investment income,  gains and losses of these accounts,  less applicable
contract  charges,  generally accrue directly to the  policyholders  and are not
included in the Company's statement of income.

Solvency Laws Assessments

The solvency or guaranty  laws of most states in which the  Company's  insurance
subsidiaries do business may require the Company's insurance subsidiaries to pay
assessments (up to certain  prescribed  limits) to fund  policyholder  losses or
liabilities of insurance companies that become insolvent.  These assessments may
be deferred  or  forgiven  under most  guaranty  laws if they would  threaten an
insurer's  financial strength and, in certain  instances,  may be offset against
future premium taxes. The Company's insurance subsidiaries' expense for guaranty
fund  assessment  from  states  which do not allow  premium  tax  offsets is not
material.

Policy Liabilities and Contractholder Deposit Funds

Liabilities for future policy benefits  related to traditional life products are
computed using the net level premium method or an equivalent  actuarial  method.
Assumptions for future  investment  yields are incorporated in these liabilities
(principally 8% for guaranteed premium products).  Assumptions for mortality and
withdrawal,  based on industry and Company experience for all products,  include
provisions for possible unfavorable deviations.  The liability for future policy
benefits  for  traditional  life  policies is graded to reserves  stipulated  by
regulatory  authorities  over a 30-year  period or the end of the premium paying
period, if less.

Contractholder  deposit funds are  liabilities  for  universal  life and annuity
products.  These  liabilities  consist of deposits  received from  customers and
accumulated net investment  income on their fund balances,  less  administrative
charges.  Universal life fund balances are also assessed mortality charges.  The
cash value benefit for these products is based on actual crediting rates,  which
are lower than assumed investment yields.

Liabilities for future policy benefits related to non-cancelable  and guaranteed
renewable  accident  and health  contracts  are  computed  based on industry and
Company experience and estimated future investment yields ranging from 4 1/2% to
6%. Unearned  premium reserves for credit life and accident and health contracts
are  computed  on  either  the  sum-of-the-year's  digits  or pro  rata  methods

                                      F-15
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

depending upon the type of coverage.  In December,  1997,  ILCO's life insurance
subsidiaries   entered  into  a  reinsurance  treaty  under  which  all  of  the
contractual  obligations and risks under accident and health insurance  policies
were assumed by a third party reinsurer. (See Note 8.)

Other Policy Claims and Benefits Payable

The  liability  for  other  policy  claims  and  benefits   payable   represents
management's  estimate  of  unpaid  losses on  claims  and  other  miscellaneous
liabilities to policyholders. Estimated unpaid losses on claims are comprised of
losses on claims that have been reported but not yet paid,  including  estimates
of additional development of initial claims estimates, and claims that have been
incurred but not yet reported (IBNR) to the Company.

The  liability  for other policy  claims and benefits  payable is subject to the
impact of changes in claim severity, frequency and other factors. Although there
is considerable variability inherent in such estimates, management believes that
the liability recorded is adequate.

Revenue Recognition

Premiums on traditional  life and health products are recognized as revenue over
the premium  paying  period when due.  Credit life and credit  health  insurance
premiums are recognized over the contract period on a pro rata basis, or the sum
of years  digits  basis.  Benefits  and  expenses  are  associated  with  earned
premiums,  so as to  result  in  recognition  of  profits  over the lives of the
contracts.

Proceeds  from  investment-related  products  and  universal  life  products are
recorded as liabilities when received.  Revenues for investment-related products
consist of contract  charges  assessed  against the deposit  fund values and net
investment  income.  Related  benefit  expenses  primarily  consist of  interest
credited to the fund values after  deductions for investment and policy charges.
Revenues for universal life products consist of net investment income, mortality
and  administration  charges  against  deposits  and fund  values and  surrender
charges  assessed  against the fund values.  Related  benefit  expenses  include
universal life benefit claims in excess of fund values and interest  credited to
universal life fund values.

Net Income Per Share

Net income per share is  calculated  based on two  methods,  basic  earnings per
share and diluted  earnings per share.  Basic  earnings per share is computed by
dividing income available to common  shareholders by the weighted average number
of common  shares  outstanding  during the period.  Diluted  earnings  per share
reflects  the  potential  dilution  that  could  occur  if  securities  or other
contracts to issue common stock were  converted or  exercised.  Both methods are
presented on the face of the income statement. 

                                      F-16
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Federal Income Taxes

In February,  1992, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (FAS 109).
The Company adopted FAS 109 on a prospective  basis  effective  January 1, 1993.
FAS 109 mandates the asset and liability  method for computing  deferred  income
taxes.  Under this method,  balance sheet amounts for deferred  income taxes are
computed  based on the tax  effect  of the  differences  between  the  financial
reporting and federal income tax basis of assets and  liabilities  using the tax
rates which are expected be in effect when these  differences are anticipated to
reverse.

New Accounting Pronouncements

In February 1997,  the Financial  Standards  Board ("FASB")  issued FAS No. 128,
"Earnings Per Share",  which  revises the  standards for computing  earnings per
share  previously  prescribed by APB Opinion No. 15,  "Earnings Per Share".  The
Statement  establishes  two measures of earnings per share.  Basic  earnings per
share is computed by dividing  income  available to common  shareholders  by the
weighted average number of common shares outstanding during the period.  Diluted
earnings  per  share  reflects  the  potential  dilution  that  could  occur  if
securities or other contracts to issue common stock were converted or exercised.
The Statement requires dual presentation of basic and diluted earnings per share
on the face of the income statement for all entities with  potentially  dilutive
securities outstanding.

The Statement also requires a reconciliation of the numerator and denominator of
the basic earnings per share computation to the numerator and denominator of the
diluted earnings per share  computation.  The Statement is effective for interim
and annual periods ending after December 15, 1997. The Company  adopted SFAS No.
128 for the year ended December 31, 1997 and has restated the earnings per share
computations for 1996 to conform to this pronouncement.

In June 1997,  the FASB issued FAS No. 130,  "Reporting  Comprehensive  Income,"
which  establishes  standards  for the  reporting  and display of  comprehensive
income  and its  components.  Comprehensive  income  is  defined  as net  income
adjusted for changes in  stockholders'  equity  resulting from events other than
net income or  transactions  related to an  entity's  capital  instruments.  The
Company  has  adopted  FAS 130 for the  year  ended  December  31,  1998 and has
restated the financial  statement  presentation for 1997 and 1996 as required by
this pronouncement.

In June 1997,  the FASB issued FAS No. 131,  "Disclosures  about  Segments of an
Enterprise and Related  Information," which establishes  standards for reporting
information about operating segments. Generally, FAS 131 requires that financial
information  be reported  on the basis that is used  internally  for  evaluating
performance.  The Company adopted SFAS 131 for the year ended December 31, 1998.
As  described  in Note 1,  the  Company  is  principally  engaged,  through  its

                                      F-17
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

subsidiaries,  in administering existing portfolios of individual life insurance
and annuity products.  The Company's insurance  subsidiaries are also engaged in
the business of marketing and underwriting individual life insurance and annuity
products in 49 states and the District of Columbia.  Such  products are marketed
through  independent,  non-exclusive  general agents.  Management  considers the
Company's  insurance  operations to constitute one reportable  segment.  Premium
revenues for  traditional  insurance  products and earned  insurance  charges on
universal  life  and  annuity   products  are  presented  in  the   accompanying
consolidated statements of income. No single customer accounts for 10 percent or
more of the Company's revenue. The Company has no foreign operations.

In February  1998,  the FASB issued FAS No. 132,  "Employers  Disclosures  about
Pensions and Other  Postretirement  Benefits," which revises current  disclosure
requirements for employers' pension and other retiree benefits. FAS 132 does not
change the measurement or recognition of pension or other postretirement benefit
plans.  The Company  adopted FAS 132 for the year ended  December 31, 1998,  and
restated disclosures for 1997 and 1996 as required by this pronouncement.

In December 1997, the Accounting  Standards Executive Committee issued Statement
of Position  ("SOP") 97-3,  "Accounting by Insurance and Other  Enterprises  for
Insurance-Related  Assessments,"  which  provides  guidance  on  accounting  for
insurance-related  assessments.  The  Company  is  required  to  adopt  SOP 97-3
effective January 1, 1999.  Previously issued financial statements should not be
restated  unless the SOP is adopted  prior to the  effective  date and during an
interim  period.  The  adoption  of this SOP is not  expected to have a material
impact on the Company's financial statements.

In  June,  1998,  the  FASB  issued  FAS No.  133,  "Accounting  for  Derivative
Instruments and Hedging Activities",  which establishes accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts,  (collectively  referred to as derivatives) and for
hedging  activities.  FAS No. 133 is applicable to financial  statements for all
fiscal  quarters of fiscal years  beginning  after June 15, 1999. As the Company
does not have significant  investments in derivative financial instruments,  the
adoption of FAS 133 does not have a material impact on the Company's  results of
operations, liquidity or financial position.

Reclassification

Certain  prior years'  amounts have been  reclassified  to conform with the 1998
presentation.

                                      F-18
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.       Investments

Fixed Maturities

The amortized cost, gross unrealized gains and losses and market values of fixed
maturities  available for sale and fixed maturities held to maturity at December
31, 1998 and 1997, respectively were as follows (in thousands):
<TABLE>

                                             Amortized     Gross Unreal-    Gross Unreal-       Market
                                               Cost         ized Gains       ized Losses         Value  
<S>                                             <C>             <C>              <C>              <C>    
Fixed Maturities Available for Sale as of
 December 31, 1998:
U.S. Treasury securities and
 obligations of U.S. government
 agencies and corporations                  $  37,360        $  3,293          $    1          $ 40,652
Obligations of states and political
 subdivisions                                   4,690             383             -0-             5,073
Corporate securities                          148,989           4,755             110           153,634
Mortgage-backed securities                    244,091           7,067             368           250,790
                                             

Total fixed Maturities Available
  For Sale                                    435,130           15,498             479          450,149
Fixed Maturities Held to Maturity:
Private placements-corporate                    3,005               54               0            3,059
                                              
Total Fixed Maturities                      $ 438,135         $ 15,552          $  479         $453,208
                                                     

Fixed Maturities Available For Sale as
 of December 31, 1997
U.S. Treasury securities and
 obligations of U.S. government
 agencies and corporations                  $  24,556        $   1,334          $   65        $  25,825
Obligations of states and political
subdivisions                                    4,686              349             -0-            5,035
Corporate securities                          119,847            4,696             630          123,913
Mortgage-backed securities                    287,747           12,458             516          299,689
                                             
Total Fixed Maturities Available For Sale
                                              436,836           18,837           1,211          454,462
Fixed Maturities Held to Maturity:
 Private placements-corporate
                                                3,412               20             100            3,332
                                            
Total Fixed Maturities                      $ 440,248        $  18,857        $  1,311        $ 457,794
</TABLE>
                                                   

                                      F-19
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amounts of  unrealized  gains and losses on fixed  maturities  available for
sale included in accumulated other comprehensive income reflected in the balance
sheet have been reduced by estimated  deferred taxes in the amount of $5,257,000
and $6,169,000 in 1998 and 1997, respectively.

The amortized cost and market value of fixed  maturities  available for sale and
fixed  maturities  held to  maturity  at  December  31,  1998 is shown  below by
contractual maturity.  Actual maturities may differ from contractual  maturities
because  borrowers  may have the  right to call or  prepay  obligations  with or
without call or prepayment penalties.
                                           Fixed Maturities Available for Sale
                                                        
                                            Amortized                 Market
                                             Cost                      Value
                                                     (in thousands)
Due in one year or less                     $ 23,437                  $ 23,578
Due after one through five years              47,730                    49,263
Due after five through ten years              27,610                    29,215
Due after ten years                           92,263                    97,303
Mortgage backed securities                   244,090                   250,790
                                          
Total Fixed Maturities Available
 for Sale                                   $435,130                 $ 450,149
                                            

                                           Fixed Maturities Held to Maturity
                                             Amortized               Market
                                               Cost                   Value
                                                                           
                                                        (in thousands)
Due in one year or less                     $   -0-                   $   -0-
Due after one through five years              2,148                     2,171
Due after five through ten years                760                       777
Due after ten years                              97                       111
Mortgage backed securities                      -0-                       -0-
                                          
Total Fixed Maturities Held to Maturity    $  3,005                  $  3,059
                                           

Proceeds from sales and  maturities of investments  in fixed  maturities  during
1998,  1997  and  1996  were   approximately   $77,700,000,   $57,840,000,   and
$53,888,000.  Gross gains of approximately $178,000,  $293,000, and $322,000 and
gross losses of approximately  $16,000  $123,000,  and $100,000 were realized on
those sales and maturities in 1998, 1997 and 1996, respectively.

                                      F-20
<PAGE>




               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity Securities

The change in net unrealized appreciation for equity securities was $(1,749,000)
and  $2,601,000  for the years ended  December 31, 1998 and 1997,  respectively.
Amounts as of December 31 were as follows (in thousands):

                                              1998                   1997  
                                          
Unrealized appreciation                   $   2,796              $  4,543
Unrealized depreciation                         (13)                  (11)
                                          
Net unrealized appreciation before tax        2,783                 4,532
Less: Federal income tax                       (974)               (1,586)
                                          
Net unrealized appreciation               $   1,809              $  2,946
                                          

Equity  securities  included a $3,083,438  investment,  ($318,390  at cost),  in
189,750 shares of common stock of Financial  Industries  Corporation  (FIC) (See
note 9). This represents 3.5% of FIC's outstanding  common stock at December 31,
1998.

The net change in  unrealized  investment  gains  (losses)  represents  the only
component of other  comprehensive  income for the years ended December 31, 1998,
1997 and 1996. The following is a summary of the change in unrealized investment
gains  (losses)  net of related  deferred  income  taxes which are  reflected in
accumulated other comprehensive income for the periods presented:

Change in Unrealized Gains (Losses)
 on Investments                       1998             1997         1996  

                                                 (in thousands)
Fixed maturities                  $  (2,607)     $   15,280    $ (17,558)
Equity securities                    (1,749)          2,602          780
                                 
                                     (4,356)         17,882      (16,778)
Deferred federal income taxes        (1,524)          6,259       (5,872)
                                 
Net change in unrealized gains 
 (losses) on investments          $  (2,832)     $   11,623    $ (10,906)


                                      F-21
<PAGE>

               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following table sets forth the reclassification adjustments required for the
years ended December 31, 1998, 1997 and 1996:

Reclassification Adjustments                  1998         1997          1996 
                                                  (in thousands)
Unrealized holding gains (losses)
 on investments arising during 
 the period                              $   (2,621)     $  11,733    $ (10,761)
Reclassification adjustments for
 gains included in  net income                  211            110          145
                                                       
                                             
Unrealized gains (losses) on
 investments, net of reclassification
 adjustment                              $   (2,832)     $  11,623    $ (10,906)
                                                                     

Net Investment Income

The  components  of  net  investment   income  are  summarized  as  follows  (in
thousands):

                                            Year Ended December 31, 
                                          1998           1997            1996  
         
 Fixed maturities                     $ 47,322        $ 46,570         $ 47,448
  Equity securities                          7              10               12
  Other, including policy loans,
  real estate and mortgage loans         8,275          14,826           15,708
                                                                  
                                        55,604          61,406           63,168
  Investment expenses                     (985)         (3,666)          (3,332)
                                              
  Net Investment Income               $ 54,619        $ 57,740         $ 59,836
                                                                         

Realized Gains and Losses

Net realized  gains (losses)  included in net  investment  income are summarized
below (in thousands):
                                                 Year Ended December 31, 
                                           1998           1997             1996

  Fixed maturities available for sale    $  161         $  171           $  222
  Equity securities                         164             (2)               1
  Other investments                         663              6             (256)
                                                              
                                            988            175               33

  Income taxes                              346             61               12
                                                                
  Net realized gains                     $  642         $  114           $   21

                                      F-22
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Mortgage loans and invested real estate

The  Company's  mortgage  loans and  invested  real  estate are  diversified  by
property type,  location and issuer.  Mortgage loans are  collateralized  by the
related  properties  and  such  loans  generally  range  from  15% to 80% of the
property's  value at the time the loan is made. No new mortgage  loans were made
during the three year period ended December 31, 1998.

Non-income producing investments

The carrying  value of non-income  producing  investments  were as follows as of
December 31:
                                   1998           1997   
                                     (in thousands)
Fixed Maturities              $    -0-       $    -0-
Mortgage loans                      81             81
                                          
Total                          $    81       $     81
                                                

3.  Disclosures about Fair Value of Financial Instruments

The estimated fair value of the Company's financial  instruments at December 31,
1998 are as follows:

                                    Carrying            Fair
                                     Amount             Value
                                          (in thousands)                     
Financial assets:
Fixed maturities                   $ 453,154        $ 453,208
Policy loans                          53,614           53,614
Mortgage loans                        10,332           10,883
Short-term investments               171,840          171,840
Cash and cash equivalents             12,206           12,206
Notes receivable from affiliates      47,645           47,645


                              Carrying              Fair
                               Amount              Value        
                                     (in thousands)          
Financial liabilities:
Deferred annuities          $ 134,062             $ 132,208
Supplemental contracts         14,859                14,228

                                      F-23
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial investments:

Fixed maturities

Fair values are based on quoted market prices or dealer quotes.

Policy loans

Policy loans are, generally, issued with coupon rates below market rates and are
considered  early payment of the life benefit.  As such, the carrying  amount of
these financial instruments is a reasonable estimate of their fair value.

Mortgage loans

The fair value of  mortgage  loans is  estimated  using a  discounted  cash flow
analysis  using  rates  for BBB-  rated  bonds  with  similar  coupon  rates and
maturities.

Cash and cash equivalents and short-term investments

The carrying amount of these instruments approximates market value.

Notes receivable from affiliates

The fair value is based on redemption value.

Senior loans

The fair value has been set at the price to call the debt.

Deferred annuities and supplemental contracts
The fair value of deferred  annuities is estimated using cash surrender  values.
Fair values for supplemental contracts is estimated using a discounted cash flow
analysis, based on interest rates currently offered on similar products.

                                      F-24
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.  Present Value of Future Profits of Acquired Business

An analysis of the present value of future profits of acquired  businesses is as
follows:

                                              1998                 1997   
                                                  (in thousands)
Beginning balance                         $  47,286            $  45,240
Acquisition of insurance subsidiary           1,981                8,357
Accretion of interest                         3,559                3,786
Amortization                                 (9,160)             (10,097)
                                     
Ending Balance                            $  43,666            $  47,286

Amortization of the present value of future profits included in the consolidated
statements of income is presented net of the accretion of interest.

The estimated  amount of present value of future  profits to be amortized net of
interest accretion during each of the next five years is as follows:
                     (in thousands)
               1999              $ 3,800
               2000              $ 3,506
               2001              $ 3,142
               2002              $ 2,912
               2003              $ 2,668
5.  Acquisition of Business

On June 30, 1998,  ILCO,  through its  subsidiary,  Investors-Indiana,  acquired
Grinnell  Life  Insurance  Company  ("Grinnell  Life")  an  Iowa-domiciled  life
insurer,  from Grinnell Mutual Life Insurance  Company for an adjusted  purchase
price  of  $16.6  million.  As  part  of  the  transaction,  Grinnell  Life  was
immediately merged with and into Investors-Indiana, with Investors-Indiana being
the surviving entity.

On July 9, 1997, ILCO and  Investors-Indiana  acquired State Auto Life Insurance
Company, an Ohio domiciled life insurer,  from State Automobile Mutual Insurance
Company,  for an adjusted cash purchase price of $11.8 million.  The transaction
was accounted for as a purchase business combination.  Accordingly,  the results
of State Auto  Life's  operations  are  included  in income from the date of the
acquisition.  The purchase  price was allocated to the fair values of the assets
and liabilities acquired including the present value of future profits disclosed
in Note 4. Under the terms of the  transaction,  State Auto Life was merged into
Investors-Indiana.

On February 14, 1995,  the Company and  Investors-NA  completed  the purchase of
Meridian Life Insurance  Company  (MLIC),  a life insurer  domiciled in Indiana,
from Meridian Mutual Insurance  Company.  Under the terms of the agreement,  the
Company acquired  approximately 82% of the outstanding  common stock of MLIC for


                                      F-25
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

$14 million. Investors-NA acquired the remaining 18% for $3 million. Immediately
after  finalizing  the  transaction,  ILCO  contributed  its acquired  shares to
unassigned  surplus of  Investors-NA,  resulting  in MLIC  being a wholly  owned
subsidiary of  Investors-NA.  ILCO's senior loans were  increased by $15 million
(through an amendment to the loan agreement) to fund its portion of the purchase
price.  Subsequent  to the  purchase,  MLIC's  name was  officially  changed  to
Investors Life Insurance Company of Indiana (Investors-Indiana). The transaction
was accounted for as a purchase business combination.  Accordingly,  the results
of  Investors-Indiana's  operations  are included in income from the date of the
acquisition.  The purchase  price was allocated to the fair values of the assets
and  liabilities  acquired,  including  the  present  value  of  future  profits
disclosed in Note 4.

6.  Senior Loans

The Senior  Loan of ILCO was  originally  arranged in  connection  with the 1988
acquisition of  Investors-NA  and  Investors-CA.  In January,  1993, the Company
refinanced its Senior Loan.  That  transaction  was done in connection  with the
prepayment of the  subordinated  indebtedness and the purchase of warrants which
had been issued as part of the financing of the 1988 acquisitions.  The terms of
the amended and restated  credit  facility  were  substantially  the same as the
terms and provisions of the 1988 senior loan. The average  interest rate paid by
the Company on its Senior Loan was approximately 7.76% during 1996, 7.68% during
1997 and 7.63% during 1998. The maturity date, which had been December 31, 1996,
was extended to July 1, 1998 for the Senior Loan.

In February,  1995,  the Company  borrowed an  additional  $15 million under the
Senior Loan to help finance the  acquisition of  Investors-IN,  and the maturity
date of the Senior Loan was further extended to July 1, 1999. As of December 31,
1995, the outstanding  principal  balance of ILCO's senior loan  obligations was
$59.4 million.  In January,  1996, the Company made a scheduled  payment of $4.5
million  under its Senior Loan. In March,  1996,  the Company made the scheduled
payments for April 1st and July 1st, totaling $9 million. At that same time, the
Company made a payment of $941,000, an additional payment under the terms of the
loan applied to the principal  balance.  On April 1, 1996, an optional principal
payment in the amount of $15 million was made,  which  resulted in advancing the
scheduled  payoff date of the Senior Loan to April 1, 1998. In July,  1996,  the
Company  made the  principal  payment for October  1st ($4.5  million),  plus an
optional  principal payment of $0.5 million.  In connection with the acquisition
of State Auto Life  Insurance  Company in July,  1997, the Senior Loan agreement
was modified to extend the maturity date to October 1, 1998.

As of December 31, 1997, the outstanding principal balance of ILCO's senior loan
obligations was $11.0 million,  which reflected the prepayment by the Company of
the payment originally  scheduled for January 1, 1998. A regular payment, in the
amount of $3.7  million,  was made on April 1, 1998 and a prepayment of the July
1, 1998 installment,  in the amount of $3.7 million,  was made on June 30, 1998.
The  outstanding  principal  balance of ILCO's senior loan  obligations was $3.6
million at June 30, 1998. The final  installment  on the senior loan  obligation
scheduled  for October 1, 1998,  was prepaid on September 30, 1998. As a result,
the senior loan obligation of ILCO was fully discharged  effective September 30,
1998. 

                                      F-26
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. Income Taxes

The Company  files  consolidated  federal  income tax returns  with its non-life
subsidiaries.  The Company's  life insurance  subsidiaries  file a separate life
consolidated  federal  income tax return.  In accordance  with the Company's tax
allocation agreement, federal income tax expense or benefit is allocated to each
member  of the  consolidated  group as if each  member  were  filing a  separate
return.

The U.S. federal income tax provision (benefit) charged to continuing operations
for the years ended December 31, was as follows:


                                     1998            1997              1996
                                                (in thousands)
  Current tax provision            $ 6,899         $ 9,005          $ 10,227
                            
  Deferred tax provision              (432)          2,057             4,278
                                                                   
  Total provision for income
   taxes                           $ 6,467        $ 11,062          $ 14,505
                                                                          
Provision  has not been made for state and  foreign  income  tax  expense  since
expense is  minimal.  Premium  taxes are paid to various  states  where  premium
revenues are earned.  Premium  taxes are included in the  statement of income as
operating expenses.

The provision for income taxes differs from the amount of income tax  determined
by applying the U.S.  statutory federal income tax rate of 35% to pre-tax income
from continuing operations as a result of the following differences:

                                                 1998       1997          1996 
                                                     (in thousands)
Income taxes at the U.S. Statutory rate        $ 6,155    $ 11,062     $ 14,505

Increase (decrease in taxes resulting from:
 Non-deductible compensation                       312         -0-          -0-

Total provision for income taxes               $ 6,467    $ 11,062     $ 14,505


                                      F-27
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Deferred  taxes are recorded for  temporary  differences  between the  financial
reporting  bases and the federal  income tax bases of the  Company's  assets and
liabilities.  The sources of these  differences  and the estimated tax effect of
each are as follows:
<TABLE>
                                                      December 31,
<S>                                             <C>                 <C>     
                                                1998                1997
Deferred Tax Liability:                              (in thousands)
  Deferred policy acquisition costs        $   6,897             $   5,773
  Present value of future profits             12,718                13,689
  Net unrealized appreciation on
   marketable securities                       6,231                 7,755
  Acquisition discounts on mortgages/
   policy loans                                1,213                 1,458
  Reinsurance recoverable                      5,607                 6,212
  Other taxable temporary differences          2,782                 1,960
                                         
  Total deferred tax liability                35,448                36,847

  Deferred Tax Asset:
  Policy reserves                              1,896                 2,858
  Invested assets                              1,759                   413
  Net operating loss carry forward             1,298                 1,465
  Minimum tax credit                             310                   300
                                         
  Total deferred tax asset                     5,263                 5,036
                                         
  Net deferred tax liability               $  30,185             $  31,811
</TABLE> 

Deferred federal income tax expense (benefit) of $(1,524,000) and $6,258,000 for
1998 and 1997,  respectively,  have been provided on the unrealized appreciation
(depreciation)  of  marketable  securities  and  included  in the balance of the
deferred  tax  liability  account.  This  increase or  decrease in deferred  tax
liability has been recorded as a reduction or increase to the equity  adjustment
due to the net change in unrealized  appreciation  or  depreciation  and has not
been  reflected in the deferred  income tax expense  included in net income from
operations.

Under the provisions of pre-1984 life insurance  company income tax regulations,
a portion of "gain from  operations" of Investors-IN  and  Investors-NA  was not
subject to current  taxation but was accumulated,  for tax purposes,  in special
tax memorandum accounts designated as "policyholders' surplus accounts". Subject
to certain  limitations,"policyholders'  surplus" is not taxed until distributed
or the  insurance  company no longer  qualifies to be taxed as a life  insurance

                                      F-28
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

company. The accumulation in these accounts for Investors-NA and Investors-IN at
December 31, 1998 was $8,225,000 and  $4,357,000,  respectively.  Federal income
tax  of  $2,879,000  and  $1,525,000  would  be due if  the  entire  balance  is
distributed at a tax rate of 35%.

The Company does not  anticipate any  transactions  that would cause any part of
the policyholders' surplus accounts to become taxable and, accordingly, deferred
taxes have not been provided on such amounts. At December 31, 1998, Investors-NA
and Investors-IN have approximately $131,000,000 and $15,500,000,  respectively,
in  the   aggregate  in  their   shareholders'   surplus   accounts  from  which
distributions could be made without incurring any federal tax liability.

At December 31, 1998,  the Company and its  non-life  wholly-owned  subsidiaries
have net operating loss carry forwards of approximately $3.7 million.

At December 31, 1998, there were no IRS examinations in progress for the Company
or its subsidiaries.

8. Reinsurance

The Company  reinsures  portions of certain policies thereby  providing  greater
diversification  of  risk  and  minimizing  exposure  on  larger  policies.  The
Company's  retention  on any one  individual  ranges  from  $60,000 to  $250,000
depending on the risk. The Company  remains liable to the extent the reinsurance
companies are unable to meet their obligations under the reinsurance agreements.

In December, 1997, ILCO's life insurance subsidiaries entered into a reinsurance
treaty under which all of the  contractual  obligations and risks under accident
and health  insurance  policies  were  assumed by a third party  reinsurer.  The
transfer  is  effective  as  of  July  1,  1997.  These  risks  and  contractual
obligations were sold pursuant to, first, a coinsurance  reinsurance  agreement.
Following applicable regulatory approvals,  the reinsurer will assume the direct
obligations of the companies,  on an assumption  reinsurance basis. The decision
to dispose of this block of business was based on management's analysis that the
business was not  generating  targeted  profit  objectives and that the products
were not part of the core  business of the  subsidiaries.  The sale  permits the
company to focus on its primary  business:  life insurance and annuity sales. In
connection with the transaction, the total amount of net reserves transferred by
the  subsidiaries was $6,327,504.  In addition to the transfer of reserves,  the
life companies paid the reinsurer $1,037,150 in connection with the transaction,
which  amount was  accounted  for as an expense for the year ended  December 31,
1997. In 1997, the  transferred  business  generated  approximately  $791,000 in
annualized premiums.

                                      F-29
<PAGE>

               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The amounts  reported in the consolidated  financial  statements for reinsurance
ceded are as follows:

                                                      December 31,  
                                             1998                     1997 
                                                   (in thousands)
 Future policy benefits                   $  10,178                 $ 10,008
 Unearned premiums                            1,878                    2,307
 Other policy claims and benefits payable     4,225                    5,434
 Amounts recoverable on paid claims           2,566                    2,684
                                            
 Reinsurance receivables                     18,847                 $ 20,433
                                                                           

                                                   Year ended December 31, 
                                           1998          1997            1996  
                                                     (in thousands)
  Premiums                               $ 11,511     $ 10,438         $ 7,962
  Policyholder benefits and expenses     $ 20,311     $ 15,286        $ 14,712

9. Shareholders' Equity

Financial  Industries  Corporation  ("FIC"),  a life insurance  holding company,
retains  ownership of  approximately  45% of the  Company's  outstanding  common
stock. FIC held options to purchase up to an additional  1,702,155 shares of the
Company's  authorized but unissued  common stock at a price equal to the average
market value during the six months  preceding the exercise  date.  These options
expired on September 30, 1998.

The Company's ability to pay dividends to its shareholders is affected, in part,
by the receipt of dividends from Investors-NA, which is organized under the laws
of the state of Washington.  Under current  Washington law, any proposed payment
of a dividend or distribution  which,  together with dividends or  distributions
paid  during the  preceding  twelve  months,  exceeds  the greater of (i) 10% of
statutory  surplus as of the  preceding  December 31 or (ii)  statutory net gain
from  operations  for the preceding  calendar  year is called an  "extraordinary
dividend"  and may not be paid until either it has been  approved,  or a waiting
period  shall  have  passed  during  which it has not been  disapproved,  by the
insurance commissioner.

In  addition,  Washington  laws require  that prior  notification  of a proposed
dividend be given to the Washington  Insurance  Commissioner  and that dividends
may be paid only from earned surplus.

                                      F-30
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net income (before surplus  debenture  interest expense) and capital and surplus
of  Investors-NA  as reported  to  insurance  regulators  and as  determined  in
accordance with statutory accounting practices are as follows:
                               Year Ended December 31,
                           1998            1997        1996  
  Net Income            $ 14,246        $ 25,925      $ 33,068
  Capital and Surplus   $ 70,627        $ 73,932      $ 56,174

The insurance regulations of the state of Washington limit the amount an insurer
may invest in the  obligations  of any one  corporation  to four  percent of the
insurer's   statutory   admitted  assets.   Investors-NA  held  $40,903,140  and
$46,057,300  in  subordinated  notes  issued  by  Family  Life  Corporation,   a
wholly-owned  subsidiary  of FIC, at December  31, 1998 and 1997,  respectively.
This  investment  exceeds the limit on  investments  prescribed  by the state of
Washington by $-0- and  $2,606,560 at December 31, 1998 and 1997,  respectively.
Prior to the acquisition of these notes,  Investors-NA received written approval
from the  Washington  State  Insurance  Department for the inclusion of the full
amount of these notes in its statutory admitted assets. At December 31, 1998 and
1997, this permitted practice increased statutory surplus by $-0- and $2,606,560
over what it would have been under prescribed statutory accounting practices.

In 1998, the NAIC adopted the  Codification of Statutory  Accounting  Principles
guidance,  which will replace the current  Accounting  Practices and  Procedures
manual as the NAIC's primary guidance on statutory  accounting.  The NAIC is now
considering amendments to the Codification guidance that would also be effective
upon  implementation.   The  Codification  provides  guidance  for  areas  where
statutory accounting has been silent and changes current statutory accounting in
some areas, e.g. deferred income taxes are recorded. It is not known whether the
Company's insurance  subsidiaries states of domicile Insurance  Departments will
adopt the  Codification,  and whether the  Departments  will make any changes to
that  guidance.  The  Company  has not  estimated  the  potential  effect of the
Codification  guidance on statutory net income and statutory capital and surplus
if adopted by the  Department.  However,  the actual  effect of  adoption  could
differ  as  changes  are  made  to  the  Codification  guidance,  prior  to  its
recommended effective date of January 1, 2001.

In 1988,  the Company  authorized  the issuance of 10 million  shares of Class C
Preferred  Stock,  $1.00 par value.  The  Company was not  permitted,  under the
provisions  of the Senior Loan  Agreements  (See Note 6), to issue any preferred
stock except Class A and Class B issued in connection  with the  acquisition  of
the Investors Life Companies. The Company has reacquired the Class A and Class B
Preferred Stock and holds the shares in treasury.

                                      F-31
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10. Retirement Plans and Employee Stock Plans

Retirement Plan

The  Company  maintains a  retirement  plan,  ("ILCO  Pension  Plan"),  covering
substantially  all  employees  of the Company.  The plan is a  non-contributory,
defined  benefit  pension  plan,  which  covers each  eligible  employee who has
attained 21 years of age and has  completed  one year or more of  service.  Each
participating subsidiary company contributes an amount necessary (as actuarially
determined) to fund the benefits provided for its participating employees.

The Plan's basic retirement  income benefit at normal retirement age is 1.57% of
the participant's  average annual earnings less 0.65% of the participant's final
average earnings up to covered compensation  multiplied by the number of his/her
years of credited service.  For participants who previously  participated in the
plan  maintained  by the Company for the benefit of former  employees of the IIP
Division of CIGNA  Corporation  (the IIP Plan),  the benefit  formula  described
above  applies to service  subsequent  to May 31, 1996.  With respect to service
prior to that date, the benefit formula  provided by the IIP Plan is applicable,
with certain exceptions applicable to former IIP employees who are classified as
highly compensated employees.

Former eligible IIP employees commenced  participation  automatically.  The Plan
also provides for early retirement, postponed retirement and disability benefits
to eligible employees.  Participant benefits become fully vested upon completion
of five years of service, as defined, or attainment of normal retirement age, if
earlier.

The pension costs for the plan includes the following components:

                                           1998        1997          1996
                                                                      
                                                (in thousands)
 Service cost for benefits earned
  during the period                      $ 460        $ 390        $ 502 
                                           
 Interest cost on projected benefit
 obligation                                793          693          686
 Expected return on plan assets         (1,235)      (1,226)      (1,128)
 Amortization of unrecognized prior
 service cost                             (229)        (229)        (229)
                                                                   
         Pension benefit                $ (211)      $ (372)      $ (169)
                                                                         
                                      F-32
<PAGE>

               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The following summarizes the funded status of the plan at December 31:

                                                1998                1997  
                                                     (in thousands)
  Change in benefit obligation:
    Benefit obligation at beginning
     of period                                $ 11,162             $ 8,936
     Service cost                                  460                 390
     Interest cost                                 793                 693
     Benefits paid                                (443)               (399)
     (Gain)/Loss due to change in
      assumptions                                  804                 -0-
     (Gain)/Loss due to experience                 (50)              1,542
                                                            
    Benefit Obligation at end of year         $ 12,726            $ 11,162
                                                                     

  Change in plan assets:                                                        

  Fair value of plan assets at
   beginning of year                          $ 15,681              $15,322

  Actual return on plan assets                   1,000                 758

  Benefits paid                                   (443)               (399)
                                                                   
  Fair value of plan assets at end of year    $ 16,238            $ 15,681
                                             
         Funded Status:

         Funded status at end of year          $ 3,512             $ 4,519

         Unrecognized prior service cost          (469)               (698)

         Unrecognized actuarial net 
          (gain) loss                            1,683                 693
                                                                  
         Prepaid pension expense at end
          of year                              $ 4,726             $ 4,514

The significant assumptions for the plans are as follows:

The discount rate for projected benefit  obligations was 7.25%,  7.75% and 7.75%

                                      F-33
<PAGE>
            INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES NOTES
                      TO CONSOLIDATED FINANCIAL STATEMENTS


in 1998, 1997 and 1996. The assumed long-term rate of compensation increases was
5.0%,  6.0% and 6.0% for 1998,  1997 and 1996.  The  assumed  long-term  rate of
return on plan assets was 8.0% for 1998,  1997 and 1996.  Assumed  expenses as a
percentage  of plan  assets  were  0%,  0% and  .5% for  1998,  1997  and  1996,
respectively.

Savings and Investment Plan

The  Company  maintains  a Savings  and  Investment  (401(k))  Plan that  allows
eligible  employees  who  have  met  a  one-year  service  requirement  to  make
contributions to the Plan on a tax-deferred  basis. A Plan participant may elect
to contribute up to 16% of eligible earnings on a tax deferred basis, subject to
certain limitations  applicable to "highly compensated  employees" as defined in
the Internal  Revenue Code. Plan  participants may allocate  contributions,  and
earnings  thereon,  between  investment  options selected by  participants.  The
Account Balance of each  Participant  attributable to employee  contributions is
100% vested at all times.  Prior to January 1, 1990,  the Company made  matching
contributions of up to 50% of the first 6% of eligible compensation  contributed
by the plan  participants.  Vesting of such  Company  contributions  is based on
number  of  years of  service.  The  employer  contributions  were  discontinued
effective January 1, 1990.

During  1995,  the Plan was  amended to allow for the  addition  of Family  Life
Insurance  Company (FLIC), a wholly-owned  subsidiary of FIC, as a participating
employer, thus allowing FLIC employees to participate in the Plan. The amendment
did not affect the Plan's tax-qualified status.

In 1997,  the Plan was  amended to provide  for a matching  contribution  by the
Company.  The match,  which is in the form of shares of ILCO  common  stock,  is
equal to 100% of an eligible participant's elective deferral  contributions,  as
defined in the Plan, not to exceed 1% of the  participant's  plan  compensation.
Allocations  are made on a quarterly  basis to the account of  participants  who
have at least 250 hours of service in that quarter.

Employee Stock Ownership Plan

During 1979,  the Company  established  an Employee  Stock  Ownership Plan and a
related  trust for the  benefit  of its  employees.  The Plan  generally  covers
employees  who  have  attained  the age of 21 and  have  completed  one  year of
service.  Vesting  of  benefits  to  employees  is based on  number  of years of
service.  No  contributions  were  made to the  Plan in 1998,  1997 or 1996.  At
December 31, 1998, the Plan had a total of 319,488 shares which are allocated to
participants.

During  1995,  the  Plan was  amended  to allow  for the  addition  of FLIC as a
participating employer, thus allowing FLIC employees to participate in the Plan.
The amendment did not affect the Plan's tax-qualified status.

                                      F-34
<PAGE>

               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Stock Option Plans

The Company applies APB Opinion No. 25 and related Interpretations in accounting
for  its  stock  option  plans,  which  are  described  below  accordingly.   No
compensation cost has been recognized by the Company in the accompanying  income
statement for its stock option plans.  Had  compensation  cost for the Company's
stock option plans been  determined  based on the fair market value at the grant
dates for awards under those plans  consistent  with the method  provided by FAS
No. 123, the impact to the Company's net income would have been immaterial.

Under the Company's  Incentive Stock Option Plan,  options to purchase shares of
the Company's  common stock,  at 100% of fair market value on the date of grant,
have been granted to key  employees.  A total of 315,000 shares of the Company's
common stock are currently reserved for issuance under this plan. As of December
31, 1998,  options to purchase 327,850 shares have been granted since the plan's
inception.  As of December 31, 1998,  241,750  options have been  exercised  and
86,100 options have been terminated.

At  December  31,  1998 there were no  options  remaining  under the ISO Plan to
purchase shares of the Company's common stock.  The number of options  exercised
in 1998, 1997 and 1996 were -0-, 72,000 and 9,500, respectively.

Under the  Non-Qualified  Stock  Option  Plan for certain  officers,  directors,
agents and others,  the Board of Directors  is  authorized  to issue  options to
purchase up to 600,000 shares of the Company's  common stock at 100% of the fair
market  value on the date of grant but in no case less than $3.33 per share.  In
1988,  options to purchase  330,000  shares were granted at a price of $3.33 per
share. In 1990,  options to purchase 30,000 shares expired.  In 1991, options to
purchase  50,000 shares were granted at prices  ranging from $8.75 to $9.25.  In
1992 options to purchase  60,000 shares  expired.  In 1995,  options to purchase
60,000  shares were granted at a price of $11.12 per share.  These same options,
along with 20,000 other options, were terminated in 1996. In 1997 42,000 options
were canceled.  There were no options granted in 1998, 1997 and 1996. The number
of options  exercised in 1998,  1997 and 1996 were 42,000,  48,000,  and 48,000,
respectively.

                                      F-35
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The following  table  summarized  activity under all Plans for each of the three
years ended December 31, 1998:
                                                  1996         Weighted Average
                                                  Shares        Exercise Price
                                                 (000's)
Outstanding at the beginning of the year           384               $  5.75
         Granted                                     0                     0
         Exercised                                 (58)                 4.24
         Canceled                                  (80)                10.65
                                                
Outstanding at the end of the year                 246               $  4.50
                                                
Options exercisable at year end                    120                $ 4.38
Weighted average fair value of options
granted during the year                                                $ -0-

                                               1997            Weighted Average
                                               Shares            Exercise Price
                                              (000's)

Outstanding at the beginning of the year           246              $   4.50
         Granted                                     0                  0.00
         Exercised                                (120)                 4.38
         Canceled                                  (42)                 7.20
                                                
Outstanding at the end of the year                  84              $   3.33
Options exercisable at year end                    -0-              $    -0-
Weighted average fair value of options
 granted during the year                                            $    -0-
                                                1998           Weighted Average
                                                Shares           Exercise Price
                                               (000's)
Outstanding at the beginning of the year           84               $  3.33
         Granted                                  -0-                  0.00
         Exercised                                (42)                  3.33
         Canceled                                  -0-                  0.00
                                               
Outstanding at the end of the year                 42                $  3.33
                                                
Options exercisable at year end                    -0-               $   -0-
Weighted average fair value of options 
 granted during the year                                             $   -0-

                                      F-36
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 1998:
                                                     Options Outstanding
                               Number Outstanding    weighted-average remaining
Range of exercise prices       December 31, 1998     contractual Life (years)
                 $3.33                   42,000                  1 year

                               Weighted Average
Range of exercise prices       Exercise prices
                 $3.33                  $3.33


                               Number exercisable     Weighted average
Range of Exercise prices       December 31, 1998      exercise price
                 $3.33                       -0-                $3.33

11. Leases

The Company and its subsidiaries occupy office facilities under lease agreements
which expire at various dates through 2005.  Certain  office space leases may be
renewed at the option of the Company.

Rent expense in 1998, 1997, and 1996 was $2,283,198, $3,147,037, and $2,466,679,
respectively, under these lease agreements. Minimum annual future rentals are as
follows:
                                              (in thousands)
                                             1999       1,783
                                             2000       1,783
                                             2001       1,766
                                             2002       1,400
                                             2003         671
                                   Thereafter           1,273
                                                    $   8,676

12. Related Party Transactions

The obligations of the Company under the Senior Loan were guaranteed by FIC. FIC
presently  owns  1,966,346  shares of the company's  Common Stock,  constituting
44.93% of such shares  outstanding.  FIC held  options to acquire an  additional
1,702,155  shares at the average bid price of such shares  during the  six-month
period preceding the date of any such purchase as long as ILCO's debt guaranteed
by FIC (the Senor  Loans)  remained  outstanding..  As  described in Note 6, the
current Senior Loan of ILCO was fully repaid on September 30, 1998. Accordingly,
FIC's rights under the 1986 option agreement expired on September 30, 1998.

                                      F-37
<PAGE>
               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FIC Property Management,  Inc., ("FIC Property"), a subsidiary of FIC, conducted
the leasing activities for the Bridgepoint Square properties previously owned by
Investors-NA. As described in Note 1, these properties were sold in 1997.

In connection  with the December,  1997 sale of  Bridgepoint  Square  Offices by
Investors-NA and Family Life Insurance Company, FIC Realty Services, Inc., ("FIC
Realty"),  a subsidiary of FIC, received a commission in the amount of $156,000,
of which  $122,538  was paid by  Investors-NA  and  $33,462 by Family  Life.  In
connection  with the 1996 sale of  Austin  Centre by  Investors-NA,  FIC  Realty
received a commission in the amount of $123,350 from Investors-NA.

As  part of the  financing  arrangement  for  the  acquisition  of  Family  Life
Insurance Company, Family Life Corporation ("FLC"), a subsidiary of FIC, entered
into a senior loan agreement  under which $50 million was provided by a group of
banks. The balance of the financing consisted of a $30 million subordinated note
issued by FLC to Merrill Lynch Insurance Group,  Ins.  ("Merrill Lynch") and $14
million borrowed by another subsidiary of FIC from an affiliate of Merrill Lynch
and  evidenced  by a senior  subordinated  note in the  principal  amount of $12
million and a junior subordinated note in the principal amount of $2 million and
$25 million  lent by two  insurance  company  subsidiaries  of ILCO.  The latter
amount was  represented by a $22.5 million loan from  Investors-NA  to FLC and a
$2.5 million loan provided  directly to FIC by Investors-CA.  In addition to the
interest provided under those loans,  Investors-NA and Investors-CA were granted
by FIC  non-transferable  options to purchase,  in the amounts  proportionate to
their  respective  loans, up to a total of 9.9 percent of shares of FIC's common
stock at a price of  $10.50  per share  ($2.10  per  share as  adjusted  for the
five-for-one  stock split in  November,  1996),  equivalent  to the then current
market price, subject to adjustment to prevent dilution. The original provisions
of the options  provided for their expiration on June 12, 1998 if not previously
exercised.  In connection with the 1996 amendments to the subordinated notes, as
described  below,  the expiration  date of the options was extended to September
12, 2006.

On July 30, 1993, the  subordinated  indebtedness  owed to Merrill Lynch and its
affiliate  was prepaid.  The Company  paid $38 million plus accrued  interest to
retire the  indebtedness,  which had a principal  balance of  approximately  $50
million on July 30,  1993.  The  primary  source of the funds used to prepay the
subordinated debt was new subordinated loans totaling $34.5 million that FLC and
Family Life Insurance  Investment Company ("FLIIC"),  another subsidiary of FIC,
obtained from  Investors-NA.  The principal amount of the new subordinated  debt
was payable in four equal annual  installments in 2000,  2001, 2002 and 2003 and
bears  interest  at an annual  rate of 9%.  The other  terms of the new debt are
substantially  the same as those of the $22.5  million  subordinated  loans that
Investors-NA had previously made to FLC and that continue to be outstanding.

In June,  1996,  the provisions of the notes from  Investors-NA  to FIC, FLC and
FLIIC were  modified  as  follows:  (a) the $22.5  million  note was  amended to
provide for twenty  quarterly  principal  payments,  in the amount of $1,125,000
each, to commence on December 12, 1996; the final quarterly principal payment is
due on September 12, 2001; the interest rate on the note remains at 11%, (b) the
$30 million note was amended to provide for forty quarterly  principal payments,
in the amount of $163,540 each for the period December 12, 1996 to September 12,
2001;  beginning with the principal payment due on December 12, 2001, the amount
of the principal payment increases to $1,336,458;  the final quarterly principal
payment is due on September  12, 2006;  the interest rate on the note remains at

                                      F-38
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9%,  (c) the $4.5  million  note was  amended  to  provide  for forty  quarterly
principal  payments,  in the amount of $24,531 each for the period  December 12,
1996 to September 12, 2001; beginning with the principal payment due on December
12, 2001, the amount of the principal payment  increases to $200,469;  the final
quarterly  principal  payment is due on September 12, 2006; the interest rate on
the note  remains at 9%, (d) the $2.5  million  note was amended to provide that
the  principal  balance  of  the  note  is  to be  repaid  in  twenty  quarterly
installments  of  $125,000  each,  commencing  December  12, 1996 with the final
payment due on September 12, 2001; the rate of interest  remains at 12%, (e) the
Master PIK note, which was issued to provide for the payment in kind of interest
due under the terms of the $2.5 million note prior to June 12, 1996, was amended
to provide that the  $1,977,119  principal  balance of the note is to be paid in
twenty  quarterly  principal  payments,  in the amount of  $98,855.95  each,  to
commence December 12, 1996 with the final payment due on September 12, 2001; the
interest rate on the note remains at 12%.

In December 1998 FLIIC was dissolved. In connection with the dissolution, all of
the assets and  liabilities  of FLIIC  became the  obligations  of FLIIC's  sole
shareholder,  FIC. Accordingly, the obligations under the provisions of the $4.5
million note described above are now the obligations of FIC.

The Company  reimbursed  FIC for rental  expenses  and certain  other  operating
expenses  incurred  during  1998,  1997 and 1996 on behalf of the  Company.  The
amount of such  reimbursement  was  approximately  $-0-,  $822,000 and $305,000,
respectively.

Data  processing  services  for  ILCO's  and FIC's  insurance  subsidiaries  are
provided by FIC Computer Service,  Inc. ("FIC  Computer"),  a subsidiary of FIC.
Each  of  FIC's  and  ILCO's  insurance  subsidiaries  has  entered  into a data
processing  agreement  with FIC  Computer  whereby FIC  Computer  provides  data
processing  services  to each  subsidiary  for fees  equal to such  subsidiary's
proportionate  share of FIC Computer's  actual costs of providing those services
to  all  of  the  subsidiaries.   The  Company's  insurance   subsidiaries  paid
$2,818,095,  $3,010,110 and $2,243,234 and Family Life paid $1,610,397, $824,425
and $1,055,639 to FIC Computer for data processing  services provided during the
years ended December 31, 1998, 1997 and 1996, respectively.

In 1995,  Investors-NA  entered into a  reinsurance  agreement  with Family Life
pertaining to universal life insurance  written by Family Life. The  reinsurance
agreement is on a  co-insurance  basis and applies to all covered  business with
effective dates on and after January 1, 1995. The agreement applies to only that
portion  of the face  amount of the  policy  which is less than  $200,000;  face
amounts of  $200,000  or more are  reinsured  by Family  Life with a third party
reinsurer.

In 1996,  Investors-NA  entered into a reinsurance  agreement  with Family Life,
pertaining to annuity contracts written by Family Life. The agreement applies to
contracts written on or after January 1, 1996.

ILCO  received  $11 million,  $14 million,  and $14 million from Family Life for
direct costs  incurred by ILCO on behalf of Family  Life's  operations  in 1998,
1997 and 1996, respectively. Under an agreement between ILCO and Family Life all
direct  costs  incurred  on  behalf  of  the  other  are to be  reimbursed.

                                      F-39
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.  Commitments and Contingencies

The Company and its subsidiaries are defendants in certain legal actions related
to the normal business  operations of the Company.  Management believes that the
resolution  of such  matters  will not have a material  impact on the  financial
statements.

14. Net Income Per Share

The following table reflects the  calculation of basic and diluted  earnings per
share:
<TABLE>

                                                            Year Ended December 31, 
<S>                                               <C>             <C>            <C>    
                                                  1998           1997            1996  
                                                (in thousands except per share amounts)
Basic:
Net income available to common shareholders   $ 11,119        $ 20,540          $26,938
Weighted average common stock outstanding        4,375           4,328            4,233
Basic earnings per share                        $ 2.54          $ 4.75          $  6.36
Diluted:
Net income available to common shareholders   $ 11,119        $ 20,540          $26,938
Weighted average common stock outstanding        4,375           4,328            4,233
Common stock options                             1,319              88            1,993
Repurchase of treasury stock                    (1,232)            (47)          (1,785)
                                            
Common stock and common stock equivalents        4,462           4,369            4,441
Diluted earnings per share                      $ 2.49          $ 4.70          $  6.07
</TABLE>

The  options  held by FIC to  purchase  ILCO stock were  excluded  from the 1997
diluted EPS calculation as they were anti dilutive.

                                      F-40
<PAGE>
                INTERCONTENTAL LIFE CORPORATION AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENT

15.  Quarterly  Financial  Data  (unaudited)  ( in  thousands,  except per share
amounts)

                                        Three Months            Three Months
                                           Ended                   Ended
                                          March 31,               June 30,

                                  1998           1997         1998        1997
                                                              
Net Operating Revenue           $  27,872     $ 27,401    $  27,527     $ 28,555
Net Income                      $   2,719     $  2,700    $  2,808      $  2,942
Basic earnings per share        $    0.63     $   0.64    $   0.64      $   0.68
Diluted earnings per share      $    0.62     $   0.61    $   0.62      $   0.67


                                      Three Months             Three Months
                                          Ended                   Ended
                                      September 30,            December 31,
                                    1998         1997         1998         1997
                                
Net Operating Revenue            $  27,269     $ 29,306     $ 26,793   $ 42,421
Net Income                       $   2,829     $  2,837     $  2,763   $ 12,061
Basic earnings per share         $    0.65     $   0.66     $   0.63   $   2.79
Diluted earnings per share       $    0.64     $   0.62     $   0.63   $   2.69

16.  Subsequent Events

On March 6, 1999, the Company's Board of Directors  approved a stock dividend in
the  amount  of one  share of ILCO  common  stock  for  each  share  issued  and
outstanding. The stock dividend was paid on March 17, 1999, to holders of record
on March 8, 1999.


                                      F-41
<PAGE>




         INTERCONTINENTAL LIFE CORPORATION AND SUBSIDIARIES SCHEDULE I -
                SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN
                        RELATED PARTIES December 31, 1998
                            (in thousands of dollars)
<TABLE>

                  Column A                Column B              Column C                Column D
<S>                                         <C>                    <C>                     <C>
                                                                                  Amount at which Shown
                                                                                  in the Balance Sheet
             Type of Investment            Costs                  Value
Fixed maturities available for sale:
United States Government and
government agencies and
authorities                             $   37,360             $   40,652              $    40,652
States, municipalities and political
subdivisions                                 4,690                  5,073                    5,073
Corporate securities                       148,989                153,634                  153,634
Mortgage-backed securities                 244,091                250,790                  250,790
                                       
Total fixed maturities available for
sale                                       435,130                450,149                  450,149
Fixed maturities held to maturity            3,005                  3,059                    3,005
                                       
Total fixed maturities                     438,135                453,208                  453,154
                                       
Equity securities:
Public utilities                                 2                      2                        2
Industrial, miscellaneous and all
other                                           18                     36                       36
                                       
Total equity securities                         20                     38                       38
                                       
                                                                                                
Policy loans                                53,614                 53,614                   53,614
Mortgage loans                              10,332                 10,883                   10,332
Real estate                                 10,025                 10,025                   10,025
Short term investments                     171,840                171,840                  171,840
                                       
Total investments                      $   683,966             $  699,608         $        699,003
                                       
</TABLE>


                                      F-42
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
                                 BALANCE SHEETS



                                               December 31, 1998 and 1997
                                                (in thousands of dollars)

ASSETS                                         1998                    1997
                                                                            
Short-term investments                     $   3,732                $    692
Cash and cash equivalents                        157                      99

Subordinated debenture receivables
 from Investors Life Insurance
 Company of North America, due
 September 30, 1999                           15,896                  27,796
Investments in and advances to 
 subsidiaries
                                             134,437                 128,305
Accounts receivable                            4,960                   4,940
Property, plant and equipment, net               265                     271
Other assets                                     388                     493
                                   
         Total Assets                 $      159,835          $      162,596
                                                                         

                                      F-43
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT
                            BALANCE SHEETS, continued
                           December 31, 1998 and 1997
                            (in thousands of dollars)

<TABLE>

LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                               <C>                 <C>    

Liabilities:                                     1998                 1997
                                                                                  
Accounts payable and accrued
 expenses                                    $   2,409            $   2,570
Senior loan                                        -0-               10,964
Deferred gain on sale of
 real estate                                       738                 847
                                                                           

Total Liabilities                                3,147               14,381
Redeemable preferred stock:
 Class A preferred stock, $1 par value,
 shares authorized and issued                    5,000                5,000
Redeemable preferred stock:
 Class B preferred stock, $1 par value,         15,000               15,000
 shares authorized and issued                   20,000               20,000

Redeemable preferred stock,
 repurchased and held as 
 treasury stock                                (20,000)             (20,000)
                                                   -0-                  -0-

Shareholders' Equity:

Common stock, $.22 par value,
 15,000,000 shares authorized;
 5,385,739 and 5,343,739 shares
 issued, 4,376,706 and 4,331,335
 shares outstanding in 1998 and
 1997, respectively                               1,185                1,176

Additional paid-in capital                        4,385                4,253

Accumulated other comprehensive
 income                                          11,571               14,403

Retained earnings (including
 $135,423 and $125,452 of
 undistributed earnings of
 subsidiaries at December 31,
 1998 and 1997, respectively)                   140,356              129,237
                                                                           
                                                157,497              149,069
Common treasury stock, at cost,
 684,273 and 687,644  shares in
 1998 and 1997                                     (809)                (854)
                                                                          
Total Shareholders' Equity                      156,688              148,215
                                                                         
Total Liabilities and
 Shareholders' Equity                     $     159,835      $       162,596
                                                                                 
</TABLE>


                                      F-44
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
           SCHEDULE II - CONDENSED FINANCIAL STATEMENTS OF REGISTRANT,
                              STATEMENTS OF INCOME
                  Years Ended December 31, 1998, 1997 and 1996
                            (in thousands of dollars)
<TABLE>

<S>                                                 <C>                <C>             <C> 
                                                    1998               1997            1996
                                                                 
Revenues charged to subsidiaries:          
Interest income                                 $  2,391           $   3,345         $  4,915
Other income                                         138                 131              133
                                           
                                                   2,529               3,476            5,048
                                           
Operating expenses                                   348                 958            2,513
Interest expense                                     415               1,417            2,613
                                           
                                                     763               2,375            5,126
                                           
Income (loss) from operations                      1,766               1,101              (78)
Federal income tax provision (benefit)               618                 385              (27)
                                           
undistributed earnings from subsidiaries           1,148                 716              (51)
                                           
Equity in undistributed earnings from
subsidiaries                                       9,971              19,824           26,989
                                           
Net income                                  $     11,119      $       20,540      $    26,938
                                                                
</TABLE>

                                      F-45
<PAGE>







               INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
                SCHEDULE II - CONDENSED STATEMENTS OF REGISTRANT
                            STATEMENTS OF CASH FLOWS
                            (in thousands of dollars)
<TABLE>

                                                         Year ended December 31,
<S>                                               <C>              <C>         <C> 
CASH FLOWS FROM OPERATING                        1998              1997        1996
                                    
ACTIVITIES:
Net income                                   $ 11,119           $ 20,540    $ 26,938
Adjustments to reconcile net
 income to net cash provided
 by (used in) operating activities:

Amortization of deferred gain
 on sale of real estate                          (110)              (109)       (110)

Unrealized appreciation of equity
 securities held by insurance
 subsidiaries                                  (1,137)             1,691         507

Decrease in accounts receivable                   (20)             1,023         -0-

Increase in investment in and
 advances to subsidiaries                      (7,820)           (26,618)     (26,284)

(Decrease) increase in accounts
 payable and accrued expenses                    (161)               344       (3,067)

Decrease in other assets                          105                           1,215

Other                                             -0-                  6            2
                                                        
Net cash provided by (used in) operating
activities                                      1,976              (2,594)       (799)
                                                        
CASH FLOWS FROM INVESTING
ACTIVITIES:
Change in short term investments               (3,040)              5,560         770
                                                        
Net cash (used in) provided by investing
activities                                     (3,040)              5,560         770
CASH FLOWS FROM FINANCING
ACTIVITIES:
Repayment of debt                             (10,964)            (13,980)    (34,441)
Stock options exercised                           141                 527         244
Purchase of treasury stock                         45                (290)        -0-
Payment received on subordinated
 debenture receivable                          11,900              10,750      34,289
                                                       
Net cash provided by (used in)
financing activities                            1,122              (2,993)         92
                                                         
Net increase (decrease) in cash                    58                 (27)         63
Cash, beginning of year                            99                 126          63
                                                        
Cash, end of year                       $         157            $     99      $  126    
                                                                                                                
</TABLE>


                                      F-46
<PAGE>


  INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY) SCHEDULE IV - REINSURANCE
                            (in thousands of dollars)


                      
                       
                                                   Ceded to           Assumed
                                   Direct            Other           From Other
1998                               Amount           Companies        Companies
Life insurance in -force       $ 7,258,662       $ 1,531,981        $   331,133
                                   
Life insurance                 $    12,782       $     2,112        $        48
Accident-health insurance            1,001               830                  1
                            
Total                          $    13,783       $     2,942        $        49
                                     
1997
Life insurance in-force        $ 7,788,147       $ 1,636,371        $   174,777
                                    
Life insurance                 $    12,661       $     2,186        $       114
Accident-health insurance              809               404                 37
                            
Total                          $    13,470       $     2,590        $       151
                                 
1996
Life insurance in -force       $ 6,934,547       $ 1,112,318        $    93,927
                                  
Life insurance                 $    10,611       $     1,913        $       101
Accident-health insurance              947              (202)                32
                            
Total                          $    11,588       $     1,711        $       133
                                                             

                                      F-47
<PAGE>


               INTERCONTINENTAL LIFE CORPORATION (PARENT COMPANY)
                      SCHEDULE IV - REINSURANCE, continued
                            (in thousands of dollars)


                                                                     Percentage
                                                 Net                  Of Amount
                                                Amount                 Assumed
1998                        
Life insurance in-force                      $ 6,057,814                 5.47%
                                             
Premium:
         Life insurance                      $    10,718                 0.45%
         Accident-health insurance                   172                 0.58%
                                      
Total                                        $    10,890                 0.45%
                                         

1997
Life insurance in-force                      $ 6,326,553                 2.76%
                                           
Premium:
         Life insurance                      $    10,589                 1.08%
         Accident-health insurance                   442                 8.37%
                                      
Total                                        $    11,031                 1.37%
                                        
1996
Life insurance in-force                      $ 5,916,156                 1.59%
                                          
         Life insurance                      $     8,799                 1.15%
         Accident-health insurance                 1,181                 2.71%
                                      
Total                                        $     9,980                 1.33%
                                                                             
                                      F-48

<PAGE>

                                   SIGNATURES


Pursuant to the requirements of Section 13 or 15 (d) of the Securities  Exchange
Act of 1934,  the  Registrant  has duly  caused  this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

                                         InterContinental Life Corporation
                                                   (Registrant)


By:      /s/ Roy F. Mitte                   By:      /s/ James M. Grace         
         --------------------------                  ---------------------------
         Roy F. Mitte, Chairman of                   James M. Grace, Treasurer,
         the Board, President and                    Principal Accounting
         Chief Executive Officer                     and Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following  persons on behalf of the  Registrant and
in the capacities indicated on March 29, 1999.

/s/ Roy F. Mitte                                     /s/ James M. Grace   
Roy F. Mitte, Director                               James M. Grace, Director

/s/ Eugene E. Payne                                   /s/ Jeffrey H. Demgen
Eugene E. Payne, Director                            Jeffrey H. Demgen, Director

/s/ Robert A. Bender                                 /s/ Theodore A. Fleron
Robert A. Bender, Director                          Theodore A. Fleron, Director

/s/ W. Lewis Gilcrease                               /s/ Richard A. Kosson
W. Lewis Gilcrease, Director                         Richard A. Kosson, Director

 /s/ Elizabeth T. Nash                               /s/ H. Gene Pruner
Elizabeth T. Nash, Director                          H. Gene Pruner, Director

/s/ Steven P. Schmitt         
Steven P. Schmitt, Director








                                      -58-

<PAGE>




                                  Exhibit Index

Exhibit                    Page           Description
Number      Number


 3(a)                                   Certificate  of   Incorporation   of
                                        InterContinental   Life  Corporation
                                        filed  May 22,  1969 and  Amendments
                                        thereto (2)

                                       (i)      Amendment filed July 16, 1973

                                      (ii)     Amendment filed August 4, 1977

                                      (iii)    Amendment filed February 10, 1983

                                      (iv)     Amendment filed December 14, 1988

                                      (v)      Amendment filed February 9, 1990

3(b)                           By-laws of InterContinental Life Corporation. (3)

 3(c)                          Articles of Incorporation of InterContinental
                               Life Corporation of Texas. (15)

 3(d)                         Amendment to Articles of Incorporation of 
                              InterContinental Life Corporation of Texas. (15)

 3(e)                         By-Laws of InterContinental Life Corporation of
                              Texas. (15)

 3(f)                         Articles of Merger of InterContinental Life 
                              Corporation and InterContinental Life Corporation 
                              of Texas. (15)

 3(g)                         Plan and Agreement of Merger Between 
                              InterContinental Life Corporation and 
                              InterContinental Life Corporation of Texas. (15)

10(a)                         Registrant's Incentive Stock Option Plan. (1)

10(m)                         Lease dated December 20, 1985 between Registrant
                              and Parker Road Associates for the rental of 40
                              Parker Road, Elizabeth, New Jersey. (4)


                                     Ex - 1

<PAGE>



10(o)                               (i)      Grid Note dated December 18, 1985 
                                    in the amount of $800,000 made by the
                                    Registrant and payable to Midlantic National
                                    Bank.  (4)

                                    (ii) Demand Note dated December 18, 1985 in
                                    the amount of $491,165.03 made by Registrant
                                    and payable to Midlantic National Bank.  (4)

10(ah)                     Credit  Agreement  for  $125,000,000
                           dated as of December  28, 1988 among
                           Registrant    and   certain    banks
                           identified therein.
                           (5)

10(ai)                     Note Purchase Agreement dated as of December 31, 1988
                           between Registrant and a Rhode Island based
                           insurance/financial services company. A Note Purchase
                           Agreement in substantially identical form was
                           executed with seven other entities identified in 
                           these exhibit. (5)

10(aj)                     Class A Preferred Stock Purchase Agreement dated as
                           of December 1, 1988 between Registrant and Insurance
                           Company of North America. (5)

10(ak)                     Class  B  Preferred  Stock  Purchase
                           Agreement  dated as of  December  1,
                           1988 between  Registrant and a Rhode
                           Island   based   insurance/financial
                           services   company.    A   Class   B
                           Preferred  Stock Purchase  Agreement
                           in substantially  identical form was
                           executed  with seven other  entities
                           identified in this exhibit. (5)

10(al)                     Pledge   Agreement   dated   as   of
                           December 28, 1988 between Registrant
                           and  The  First   National  Bank  of
                           Chicago, as Agent.
                           (5)

10(am)                     Surplus Debenture dated as of December 28, 1988 in 
                           the amount of $140,000,000 made by Standard to 
                           Registrant.  (5)

10(an)                     Warrant Agreement dated as of December 29, 1988 
                           between Registrant and a Connecticut based insurance/
                           financial services company.  A Warrant Agreement in 
                           substantially identical form was executed with seven
                           other entities.  (5)

10(aq)                     Registrant's Defined Benefit Pension Plan, effective
                           as of January 1, 1988.


                                                      Ex - 2

<PAGE>



10(ar)                   Registrant's Employee Stock Purchase Plan, effective 
                         as of August 25, 1989.  (6)

10(as)                   Registrant's Non-Qualified Stock Option Plan.  (6)

10(at)                   Exchange and Amendment Agreement dated July 30, 1990
                         between Registrant and the holders of its Class A 
                         Preferred Stock and its Class B Preferred Stock.  (7)

10(au)                   Amendment dated July 30, 1990 to Senior Loan Agreement
                         among the Registrant and certain banks identified 
                         therein.  (7)

10(av)                   InterCreditor  Agreement  dated June
                         12,  1991,   among   Investors  Life
                         Insurance  Company of North America,
                         Investors Life Insurance  Company of
                         California,  Merrill Lynch Insurance
                         Group, Inc. and Merrill Lynch & Co.,
                         Inc.
                         (8)


10(aw)                   Note  dated  June  12,  1991  in the
                         amount  of  $22.5  million  made  by
                         Family Life  Corporation in favor of
                         Investors Life Insurance  Company of
                         North America. (8)

10(ax)                   Note dated June 12, 1991 in the amount of $2.5 million 
                         made by Financial Industries Corporation in favor of
                         Investors Life Insurance Company of California.  (8)

10(ay)                   InterCreditor Agreement among Investors Life Insurance
                         Company of North America, Investors Life Insurance
                         Company of California and the Agent under the Credit
                         Agreement dated as of June 12, 1991.  (8)

10(az)                   Option Agreement by Financial Industries Corporation in
                         favor of Investors Life Insurance Company of North 
                         America and Investors Life Insurance Company of 
                         California.  (8)

10(aaa)                  Hotel Lease Agreement dated as of August 22, 1991 
                         between Investors Life Insurance Company of North 
                         America and FIC Realty Services, Inc.  (9)

10(aab)                  Management Agreement dated as of September 4, 1991
                         between Investors Life Insurance Company of North 
                         America and FIC Property Management, Inc. (9)


                                                      Ex - 3

<PAGE>



10(aac)                  Amended and Restated Credit Agreement dated January 29,
                         1993 among the Registrant and certain banks identified
                         therein.  (10)

10(aad)                  Amended and Restated Pledge Agreement dated January 29,
                         1993 between the Registrant and the agent bank named
                         therein.  (10)

10(aae)                  Stock Option Agreement dated March 8, 1986 between
                         Registrant and Financial Industries Corporation.  (10)

10(aaf)                  Surplus   Debenture   dated   as  of
                         November  13,  1986 in the amount of
                         $15,000,000  made by New Standard to
                         Registrant.
                         (10)

10(aag)                  Terms and Conditions of Employment Contracts of James M
                         Grace, Eugene E. Payne and Joseph F. Crowe approved by
                         Registrant's Board of Directors on May 16, 1991,  ((10)

10(aah)                  Letter agreement and addendum dated July 23, 1992 
                         between Investors Life Insurance Company of North 
                         America and Mr. and Mrs. Theodore A. Fleron.  (10)

10(aai)                  Letter agreement dated October 15, 1992 between Roy F.
                         Mitte and Registrant evidencing surrender and 
                         cancellation of stock options.  (10)

10(aaj)                  Note dated July 30, 1993 in the amount of $30 million 
                         made by Family Life Corporation in favor of Investors 
                         Life Insurance Company of North America.  (11)

10(aak)                  Note dated July 30, 1993 in the amount of $4.5 million
                         made by Family Life Insurance Investment Company in  
                         favor of Investors Life Insurance Company of North 
                         America.  (11)

10(aal)                  Amendment No. 1 dated July 30, 1993 between Family Life
                         Corporation and Investors Life Insurance Company of 
                         North America amending $22.5 million note.  (11)

10(aam)                  Cancellation of Stock Option Agreement dated October 21
                         1993 between Registrant and Roy F. Mitte.  (11)

10(aan)                  Waiver and Amendment Agreement dated
                         as  of  July  23,   1993  among  the
                         Registrant    and   certain    banks
                         identified therein.
                         (12)

                                     Ex - 4

<PAGE>



10(aao)                  Amendment   Agreement  dated  as  of
                         December    20,   1993   among   the
                         Registrant    and   certain    banks
                         identified therein.
                         (12)

10(aap)                  Amendment Agreement dated as of March 12, 1994 among
                         the Registrant and certain banks identified therein.
                         (12)

10(aaq)                  Amendment   Agreement  dated  as  of
                         December    22,   1994   among   the
                         Registrant    and   certain    banks
                         identified therein.
                         (12)

10(aar)                  Amendment Agreement dated as of February 10, 1995 among
                         the Registrant and certain banks identified therein.
                        (12)


10(aas)                  Data Processing Agreement dated as of November 30, 1994
                         between InterContinental Life Insurance Company and FIC
                         Computer Services, Inc.  (12)


10(aat)                  Data Processing Agreement dated as of November 30, 1994
                         between Investors Life Insurance Company of North
                         America and FIC Computer Services, Inc. (12)

10(aau)                 Data Processing Agreement dated as of November 30, 1994
                        between Family Life Insurance Company and FIC Computer
                        Services, Inc.  (12)

10(aav)                 Lease Agreement dated as of September 30, 1994 between
                        FIC Realty Services, Inc. and Atrium Beverage
                        Corporation. (12)

10(aaw)                 Management Agreement dated as of September 30, 1994
                        between HCD Austin Corporation as agent for FIC Realty
                        Services, Inc. and Atrium Beverage Corporation. (12)

10(aax)                 Amendment Agreement dated as of August 8, 1995 among
                        the Registrant and certain banks identified therein.(13)

10(aay)                 Amendment   Agreement  dated  as  of
                        December    15,   1995   among   the
                        Registrant    and   certain    banks
                        identified therein.
                        (13)

10(aaz)                 Agreement   of  Sale   dated  as  of
                        September   5,  1995   between  Omni
                        Congress  Joint venture as Buyer and
                        Investors Life

                                                      Ex - 5

<PAGE>



                               Insurance Company of North America as Seller,
                               with exhibits, amendments and assignment.  (13)

10(aaaa)                       Amendment  No. 2 dated  December 12,
                               1996, effective June 12, 1996 to the
                               note  dated  June  12,  1991  in the
                               amount  of  $22.5  million  made  by
                               Family Life  Corporation in favor of
                               Investors Life Insurance  Company of
                               North America. (14)

10(aaab)                       (i) Amendment No. 1 dated December 12, 1996,
                               effective June 12, 1996 to the note dated June
                               12, 1991 in the amount of $2.5 million made by 
                               Financial Industries Corporation in favor of 
                               Investors Life Insurance Company of California.
                              (14)

                               (ii)     Amendment   No.   1   dated
                                        December      12,     1996,
                                        effective  June 12, 1996 to
                                        the   "payment   in   kind"
                                        provisions   of  the   note
                                        dated June 12,  1991 in the
                                        amount of $2.5 million made
                                        by   Financial   Industries
                                        Corporation   in  favor  of
                                        Investors   Life  Insurance
                                        Company  of North  America.
                                        (14)

10(aaac)                       Amendment No. 1 dated December 12, 1996, 
                               effective June 12, 1996 to the note dated July
                               30, 1993 in the amount of $30 million made by
                               Family Life Corporation in favor of Investors 
                               Life Insurance Company of North America.(14)

10(aaad)                       Amendment No. 1 dated December 12, 1996, 
                               effective June 12, 1996 to the note dated July
                               30, 1993 in the amount of $4.5 million made by
                               Family Life Insurance Investment Company in favor
                               of Investors Life Insurance Company of North
                               America. (14)

10(aaae)                       Amendment   Agreement  dated  as  of
                               April 24,  1996  between  Registrant
                               and   certain    banks    identified
                               therein.(14)

10(aaaf)                       Waiver   Agreement   dated   as   of
                               December 12, 1996 between Registrant
                               and   certain    banks    identified
                               therein.(14)

10(aaag)                       Amendment Agreement dated December 12, 1996 to 
                               the Option Agreement by Financial Industries 
                               Corporation in favor of Investors Life Insurance
                               Company of North America and Investors Life 
                               Insurance Company of California. (14)


                                                      Ex - 6

<PAGE>



10(aaah)                        Amendment and Waiver Agreement dated
                                as  of  March  31,  1997  among  the
                                Registrant    and   certain    banks
                                identified therein. (16).

10(aaai)                        Amendment and Waiver Agreement dated
                                as of  December  9,  1997  among the
                                Registrant    and   certain    banks
                                identified therein. (16).

10(aaaj)          Ex-9          Assignment Agreement  dated December 23, 1998, 
                                from Family Life Insurance Investment Company to
                                Financial Industries Corporation, assigning the
                                9% Senior Subordinated Note dated July 30, 1993
                                in the amount of $4.5 million made by Family 
                                Life Insurance Investment Company in favor of
                                Investors Life Insurance Company of North 
                                America.

21                Ex-11         Subsidiaries of the Registrant.

23                Ex-12         Consent of PricewaterhouseCoopers, LLP.



 (1)     Filed with the  Registrant's  Annual Report of Form 10-K for the fiscal
         year  ended  December  31,  1983,   Commission  File  No.  0-7290,  and
         incorporated herein by reference.

 (2)     Filed  with  the  Registrant's   Registration  Statement  on  Form  S-8
         (Registration No. 2085333) and incorporated herein by reference; except
         Amendment  filed  December 14, 1988 (item  (iv)),  which was filed with
         Registrant's  Current  Report of Form 8-K dated  January 12, 1989,  and
         incorporated herein by reference; and Amendment filed February 9, 1990,
         which was filed with  Registrant's  Annual  Report on Form 10-K for the
         fiscal  year  ended  December  31,  1989,  and  incorporated  herein by
         reference.

 (3)     Filed with the  Registrant's  Annual Report on Form 10-K for the fiscal
         year ended December 31, 1984 and incorporated herein by reference.

 (4)     Filed with the  Registrant's  Annual Report of Form 10-K for the fiscal
         year ended December 31, 1985 and incorporated herein by reference.

 (5)     Filed with Registrant's  Annual Report of Form 10-K for the fiscal year
         ended December 31, 1988, and incorporated herein by reference,

 (6)     Filed with  Registrants  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1989, and incorporated herein by reference.

 (7)     Filed with Registrant's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1990, and incorporated herein by reference.

                                                      Ex - 7

<PAGE>



 (8)     Filed with Financial  Industries  Corporation's  Current Report on Form
         8-K dated June 25, 1991, and incorporated herein by reference.

 (9)     Filed with Registrant's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1991, and incorporated herein by reference.

(10)     Filed with Registrant's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1992, and incorporated herein by reference.

(11)     Filed with Registrant's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1993, and incorporated herein by reference.

(12)     Filed with Registrant's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1994, and incorporated herein by reference.

(13)     Filed with Registrant's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1995, and incorporated herein by reference.

(14)     Filed with Registrant's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1996, and incorporated herein by reference.

(15)     Filed with  Registrant's  Quarterly  Report on Form 10-Q for the fiscal
         quarter ended June 30, 1997, and incorporated herein by reference.

(16)     Filed with Registrant's  Annual Report on Form 10-K for the fiscal year
         ended December 31, 1997, and incorporated herein by reference.



                                     Ex - 8

<PAGE>



                                Exhibit 10(aaaj)


Assignment of 9% Senior Subordinated Note Dated July 30, 1993


This Assignment Agreement  ("Assignment") is entered into effective December 23,
1998  ,  1998  by and  between  Family  Life  Insurance  Investment  Corporation
("Assignor"),  Financial Industries Corporation  ("Assignee") and Investors Life
Insurance Company of North America ("Payee").

          WHEREAS,  Assignor  is the  obligor  and Payor  under that  certain 9%
          Subordinated  Senior Note dated July 30, 1993 in the principal  amount
          of $4,500,000,  as amended by Amendment No. 1 dated December 12, 1996,
          with a current  principal  balance  of  $4,279,221  (as  amended,  the
          "Note"), and

          WHEREAS,  Investors  Life  Insurance  Company of North  America is the
          Payee under the Note, and

          WHEREAS,  Assignor will dissolve pursuant to a Plan of Dissolution and
          Articles of Dissolution dated November 30, 1998 which were prepared by
          the Board of Directors of Assignor and approved by the shareholders of
          Assignor, and

          WHEREAS,  Assignee has agreed to assume all of the rights,  duties and
          obligations of Assignor under the Note, and

          WHEREAS,  Payee has agreed to release Assignor from Assignor's  duties
          and obligations under the Note once the Note is assumed by Assignee,

          NOW THEREFORE,  for good and valuable  consideration,  the receipt and
          sufficiency of which is hereby acknowledged,  the parties hereto agree
          as follows:

         1.       Capitalized  terms used  herein and not  otherwise  defined in
                  this  Assignment  shall have the meanings  attributed  to such
                  terms in the Note.

         2.       Assignor  hereby  assigns  and sets  over to  Assignee  all of
                  Assignor's rights, duties and obligations under the Note.

         3.       Assignee hereby accepts all of Assignor's  rights,  duties and
                  obligations  under the Note and agrees to  perform  all of the
                  duties and obligations contained in the Note.

         4.       By consenting to this  Assignment,  Payee agrees that Assignee
                  shall assume all of Assignor's rights,  duties and obligations
                  under the Note.

                                     Ex - 9

<PAGE>



          IN  WITNESS  WHEREOF,   Family  Life  Insurance   Investment  Company,
          Financial Industries  Corporation and Investors Life Insurance Company
          of North  America have  executed  this  Assignment as of December 23 ,
          1998

                                      Assignor:

                                      FAMILY LIFE INSURANCE
                                      INVESTMENT CORPORATION

                                      By: /s/ James M. Grace
                                      Name:   James M. Grace 
                                      Title: Executive Vice President        


                                      Assignee:

                                      FINANCIAL INDUSTRIES
                                      CORPORATION

                                      By:   /s/ Roy F. Mitte 
                                      Name:    Roy F. Mitte     
                                      Title:     President   


Approved and Agreed to by Payee:

INVESTORS LIFE INSURANCE COMPANY
OF NORTH AMERICA

By: /s/ Roy F. Mitte                         
Name:   Roy F. Mitte                        
Title:    President                              

                                     Ex - 10

<PAGE>






                                   EXHIBIT 21

                           SUBSIDIARIES OF REGISTRANT

                Investors Life Insurance Company of North America

                   Investors Life Insurance Company of Indiana

                           ILG Securities Corporation

                              ILG Sales Corporation

                       InterContinental Growth Plans, Inc.

                      InterContinental Life Agency, Inc. *



         *Wholly-owned subsidiary of InterContinental Growth Plans, Inc.




                                     Ex - 11

<PAGE>









                                   EXHIBIT 23




                       CONSENT OF INDEPENDENT ACCOUNTANTS



We  hereby  consent  to the  incorporation  by  reference  in  the  Registration
Statement on Form S-8 (No. 33-71074) of InterContinental Life Corporation of our
report dated March 26, 1999 appearing on page F-2 of this Form 10-K.







PricewaterhouseCoopers LLP
Dallas, Texas
March 26, 1999


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